In my first year of running CCAW full time, I did an awful job of keeping my personal and business expenses separate. Considering my financial background, one would think I’d have been on top of this from day one. I wasn’t. I did a good job tracking gross profitability. But I used company profits to supplement my personal life. Once I surrounded myself with other entrepreneurs, I learned that was a common bad habit. And I learned how to rectify the situation.
Mingling business and personal expenses is unwise for a variety of reasons. I’ll share a few here:
- Taxes – Filing accurate tax returns is more challenging when expenses incurred by the business may or may not be related to the business. This can come back to haunt a founder, usually at the worst possible time.
- Decision-making – It’s hard to rely on the data to make business decisions when there are non-business-related expenses in the data.
- Bad example – When employees see this type of behavior, it sets a bad example from the top. Employees may think it’s OK and mimic you.
- Mentality – If you begin by using the company as a personal piggy bank, you’ll tend to do so more and more as the piggy bank gets more dimes and quarters in it.
- Tug of war – A growing company may require a reinvestment of profits to fuel further growth. Decision-making can be challenging when the founder has to choose between maintaining the lifestyle to which they’ve become accustomed and growing the company.
- Owner versus employee – Founders often own the company and work in the company. These are two separate things and should be treated as such. Founders should get a wage for the work they do in the business. If the business is profitable and it make sense to take cash out of the company, an annual distribution or dividend can be paid to the owners.
This list isn’t comprehensive; it’s just a few of the reasons you shouldn’t mix business and personal expenses. Going into 2021, founders who are mixing should consider starting the New Year off on the right foot.