It can be so easy to do in any type of business, but especially one that is family-run like a farm…. Mixing personal funds with business funds. Money moves from one account to another often start out small and happen on rare occasion, but they can quickly pick up in size and frequency.
Trust us when we say this is a dangerous practice that can lead to all types of financial issues. We asked some of our team members to weigh in on what can happen if these types of money moves become a habit:
When a small business owner comingles their personal funds and their business funds, accounting for the business can be hard to execute. This often leads to business financials incorporating personal expenses or excluding business expenses, which then portrays an inaccurate financial position of the company. When looking at inaccurate financials of the company, you can’t really tell which parts of the business are doing well, and not so well, making it difficult to make business decisions.- Natalie Bruns
Not drawing a line between your personal funds and your business funds can indicate a lack of dedication to the success of your business. In order for a business venture to succeed, it needs a solid foundation and strong business plan. One path to building that foundation is to set up records that will clearly track the cash flow, income, and expenses, specific to your business activities. Peppering your records with both personal and business activity simply muddies the water, making things harder to track. While proper bookkeeping can trace a personal expense that flows through the business funds, or a business expense that hits your personal funds, those instances should be the exception to the rule and not an everyday occurrence.- Tammy Westbrook
Mixing personal and business funds can cause both accounting and tax problems. The IRS only allows businesses to deduct business expenses on the annual tax return. If your business were to be selected for an audit by the IRS, you will want an accurate set of books to show a clear record of business expenses paid. If you think you can comingle expenses and then clean up the books before year-end, be prepared to spend a lot of time or money to pay your accountant to separate them for you before a tax return can be prepared. – Danielle Cottle
Questions about how to handle the finances for your farm or agribusiness operation? Reach out to us for assistance. We are here to help.