Keep it simple and separate

Kevan Govender, area manager for Business Partners uMhlanga, advises how to manage accounts for a start-up business

IN THE first heady months of starting your own venture, when the business is nothing but you, a laptop, a sidekick and a bakkie, it seems impractical to follow the textbooks and the golden rule of keeping your business finances separate from your personal finances in the form of two separate bank accounts.

The argument is often given that if the fees for having a business account are going to be more than your first month’s income, why not just run your business out of your personal account?

But the reason you should not join your business and personal bank accounts is simple: extricating yourself from the tangle of your personal and business finance down the line is much more expensive than paying two sets of bank fees from the beginning, even with high banking fees in South Africa.

Though, if you are concerned about fees and need to cut costs here, rather open a savings account for your business to begin with.

It is cheaper than a business account and while this type of account does not have an overdraft facility, your business probably won’t qualify for one at this early stage anyway.

Whatever you do, have a separate bank account for your business.

Business owners often decide too late to split their personal and business finance. By that time they’re in a huge hole, having to explain the mess to the tax man, or to a potential investor. If you find yourself in this position, it is important to do three things immediately.

Firstly, admit that your accounts are a mess and that you need to sort it out as soon as possible.

Secondly, start budgeting immediately, even if it is still a jumble of business and personal finances, just get as much control over your cash flow as you possibly can and as quickly as you can.

Thirdly, grit your teeth and pay a professional to help you sort it out. It may be expensive, but less so than trying to pull yourself out of the mess by yourself.

Almost all business owners face the temptation of mixing personal and business finances, even those who have had two separate bank accounts from the start.

In South Africa, it is easier and cheaper to raise personal finance than business finance. Many business owners use their home loan facilities for business finance, and in crisis situations, use the credit cards they were issued when they were still earning a salary.

Given the tough financial landscape, these are valid strategies, but the trick is to maintain separation in your accounting. By drawing funds from your personal accounts, you, the business owner, are making a loan to your business – it needs to be recorded as such

Prohibitive cash-deposit fees at banks also make many business owners hang on to large amounts of cash which they use to pay expenses. Again, this is a valid cost-saving strategy as long as you keep careful records and resist the temptation of dipping into it for some personal spending.

If you find yourself regularly using this money for personal use, rather pay the bank fees.

The idea of tax evasion and hiding personal expenses as that of the business, is also simply not worth it. This was explained in the recent Budget speech where Minister of Finance, Pravin Gordhan said that the government would continue to act aggressively against tax evasion.

Apart from the ethics, the practice contains so many hidden costs – the effort of creative accounting, the risk of a tax audit, and one day having to explain to a potential buyer of your business that, actually, it is more profitable than it looks.

Growing your business as an owner-managed business is a difficult and complicated undertaking. Don’t make it more so by mixing your personal and business finances.