I recently did a Twitter poll and was pleasantly surprised that 100% of the respondents said they had a separate bank account for their business*. What I've actually found in practice though is that people don't always have a business bank account. If you're running a limited company, you do need to have a business bank account and if you're a limited company without a business bank account, don't even read on, just set up a bank account! Legally if you're a sole trader though, you could, in theory put all your business transactions through your own personal bank account - but it's not a great idea. Here are the top reasons why you need a separate bank account for your business.
1. To keep everything separate
The last thing you want to do when recording your business expenses is to go through all the transactions on your bank statement and try to remember whether they were for the business or not. Can you remember whether that £20 you spent at Wilko four months ago was for office stationery or cleaning products for your house? Me neither. Keeping your business transactions separate keeps things simple.
2. To put money aside for your tax bill
If your business is profitable, you will, more than likely, have a tax bill to settle up at the end of the financial year. If you keep your business money separate from your personal money, it's easier to keep money aside to pay your tax bill when it's due - the last thing you want to do is get to 31 January and realise you can't pay your tax bill because you spend the money on Christmas presents! You might even consider having a second business bank account for your business's "savings", just for this type of thing.
3. Consistency for your customers
You want to make it as simple as possible for your customers to pay you, and changing your bank details once you're an established business can be a bit painful in terms of making sure every customer pays you into the correct account. If you set up a separate bank account for your business now and make sure that account is the one on your invoices, you won't have to go through the pain of informing all your customers of your new bank details once you're more established with many more customers.
4. It makes it easier to keep an eye on your cash flow
If your business's money is separate from your personal money, it's much easier to see how the business is doing. You'll be able to easily see how much money is in the business bank account, and whether you're getting close to that overdraft. It's much harder to forecast cash flow for your business if you combine business and personal transactions in the same account.
5. It makes budgeting easier in your personal life too
A lot of business owners are also employed, particularly when they're starting out. If you have a salary, personal bills and then business income and expenditure all going through the same account, it's much harder to keep sight of how healthy your personal bank balance is. If you keep your personal financial affairs separate from those of the business, and pay yourself a set monthly amount from the business (via drawings if you're a sole trader), you'll have a much better idea of what's going in and out of your personal account each month.
6. It just makes good business sense
Having a separate bank account for your business just makes good sense. Keeping transactions separate keeps things cleaner, helps you budget and forecast, and helps you understand your business better. If you ever decide to bring in a business partner or to turn the business into a limited company, the business's money will be held separately and all transactions will be together in one place.
*You can follow me on Twitter @but_the_books