A Common Mistake New Company Directors Make And One Solution To Solve It
As new company directors navigate their roles, they often encounter numerous financial management challenges that can significantly impact their business’s operations and growth. Among these challenges, the practice of using personal funds for business expenses is notably problematic. Although it might seem like a convenient shortcut (especially during times of financial difficulty), this habit can create lasting complications when it comes to financial reporting and management.
The Problem…
Many new company directors find themselves occasionally paying for business-related expenses with personal debit cards or from personal bank accounts. Common scenarios include unexpected purchases that need to be made on the spot, or expenses incurred during travel. However, this mix of personal and business finances leads to several issues such as:
Complex Bookkeeping – Mixing personal and business finances complicates tracking and recording expenses. Each personal transaction used for business purposes must be documented, justified, and reimbursed. This not only makes the bookkeeping process more labour-intensive but also increases the risk of errors and inconsistencies.
Increased Bookkeeping Costs – If you employ a professional bookkeeper or accountant, their job becomes more complex and time-consuming when your personal transactions as a company director are involved. This complexity often translates into higher fees as more hours are needed to sort out the financial records.
Increased Admin Time – When business transactions go through your personal credit cards and personal bank accounts, your bookkeeper or accountant doesn’t have visibility of those. You then need to identify those expenses personally and provide the details to your bookkeeper or accountant so they can process them accordingly.
Impaired Cash Flow Visibility – Effective financial management is built on a clear understanding of your business’s cash flow. Using personal funds as a company director obscures the true financial state of the business, making it difficult to make informed financial decisions or plan strategically for growth.
Tax Implications – Mixing personal and business finances can lead to tax reporting errors. Accurately claiming tax-deductible business expenses becomes challenging when these expenses are mingled with personal finances, potentially leading to issues with tax authorities, and nobody wants that!
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The Solution…
The most effective way to avoid mixing personal and business finances is to establish and maintain clear boundaries between the two. Here’s a few ways you can implement this practice:
Give cash injections to your business bank account – As a limited company you are required to have a business bank account. Even though you are a company director and very likely a shareholder as well, you shouldn’t be using your personal bank accounts. Instead of paying for things using your personal credit or debit cards, give the business a cash injection as one lump sum and then make various purchases using a business card. This separation simplifies accounting procedures and ensures that all financial activities are clearly documented and easy to track.
Regular Financial Reviews – Conduct regular reviews of your business finances with your accountant or bookkeeper. These reviews can help ensure that your financial practices remain in line with best practices and compliance requirements. They also provide an opportunity to adjust strategies as your business grows and changes.
Plan Cash Flow Carefully – Understanding your business’s cash flow needs is crucial. Prepare detailed cash flow forecasts to anticipate upcoming expenses and ensure that your business bank account is sufficiently funded to cover these costs. This proactive financial planning prevents the need to dip into personal funds.
For new company directors, maintaining a clear separation between personal and business finances is not just about simplifying bookkeeping, it’s about laying a foundation for sound financial management and business growth. By implementing these straightforward strategies, you really can enhance your financial clarity, improve compliance, and better position your business for future success.
At Joanna Bookkeeping, there are a lot of ways we can help to support your business. If you want to avoid getting stuck in red tape and make sure everything is done correctly from day one and beyond, then let us show you how! Book a call with our Oxford accountant to see how we can help.
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