You’re out having lunch with a prospect that you’ll pay for out of your business account. On the way back to your office you stop at the pharmacy to pick up a few things that you need for home. You use your business cash for that as well.
This is one of many common and unavoidable scenarios for entrepreneurs and small business owners.
Having a procedure in place that allows you to track for this is helpful in two important areas; taxes and reporting. Here’s why:
1. You avoid many hours of ferreting between them when preparing your taxes
2. Month end and year-end financial reports for your business will reflect accurate results for sales and expenses and therefore your net income and margins so you know exactly how you measure up.
The expenses that are most prone to mixing in with personal expenses are
Travel & Entertainment, including meals & office supplies.
When not properly accounted for, these expenses leak your profits and are also red flags for the IRS, particularly the travel and entertainment expenses. Implementing a simple policy and a tracking procedure for spending in this area will keep these expenses organized and clear so that your month end financial reports are accurately reflected and there’s no rushing to organize the information for taxes.
What to Consider:
1. A Rule of Thumb:
Whether you’re taking clients to lunch, to play a round of golf, or a game of tennis, it’s usually to build a relationship or to maintain a relationship for generating business revenue which can all be claimed as a business expense. That’s easy.
If you have a golf or tennis club membership that is used primarily for clients and prospects but occasionally you take family and friends, this can still be claimed as a business expense.
The reasoning here is that if at least 80% of the membership is used for business either generating revenue or building vendor relationships, then the membership can be claimed as a business expense.
2. Simple Policies That Make a Big Difference
When you agree to meet a client for dinner and pick up the tab but they show up with a significant other and others you didn’t expect who are not relevant to your business, should you or do you pick up the tab? This is one to consider having a policy for. It’s one of those situations that if you let it go once without addressing it, it may continue and get out of hand costing you more than anticipated which is why it’s best to nip this one in the bud early. If you have a policy in place and there’s a plan for entertainment expenses with limits, you will need to articulate your policy expectations to clients and prospects before meeting with them. As your business grows you can update your policies as you see fit.
3. Tracking Personal Expenses Spent With Business Money
Whether you use business cash, debit, or credit cards for personal reasons tracking it will keep you organized and make your life easy.
The best way to handle this is to set up a loan on the business side so you can see month to month what the personal expenses were to the business. Decide how often you will pay back the business. You can do this by either writing a check from your personal account or by taking less of a draw. When you take less of a draw, be sure that your personal expenses are covered. You may start out with doing this one way and then make changes as you grow.
It’s important to keep business and personal expenses separate as much as possible. By acknowledging the rule of thumb and creating a simple policy along with a tracking procedure, you will avoid the headaches and the amount of work it takes to organize this area of your business. Initially there’s a little work and some foresight involved, but worth the effort it requires as you go forward and your business grows.