As a business owner, you will spend a lot of time dealing with financial matters. The way you handle them can make a big difference in how successfully your business succeeds.
The first step is to separate your personal finances from those of your business. You may be tempted to use the money for your business to pay for something that isn’t an appropriate business expense. If you’re buying a car, for example, it seems convenient just to charge it to the company, but that can be a bad idea.
If you have a situation where you have expenses that aren’t appropriate for your business, then either get other financing or wait until you have more money from your business available to pay for those expenses. Don’t mix the two together.
Having a clear separation between business and personal finances allows you to concentrate on making sure your business is doing well. It also makes it easier to track how well things are going financially so that you can make better decisions about how much time and effort you want to put into your business in the future.
Don’t let what happens in one part of your life affect what’s happening in another part of your life in ways that aren’t good for either one.
Most people who take money from other people to finance a business run into trouble with the taxman sooner or later, and the reason is that they mix business and personal finances. It may seem convenient to have a business bank account and a personal bank account linked by a single debit card but it is a mistake.
The general rule is that if you pay for something you consume yourself it’s a personal expense, and if you pay for something you do business with it’s a business expense. The tax authorities will not allow you to claim both. When I was an accountant, this mistake was so common that I could tell how long someone had been in business by looking at their tax return.
In the early stages of building an online service, when almost everything is being consumed directly by the development work or because there isn’t any cash flow yet, it can be hard to keep track of what is going on. But getting good bookkeeping software should help.
If your business is a corporation, you don’t have to. If the corporation owes you money, it’s a liability of the corporation, and if you take money out of the corporation to pay yourself, it’s still a liability. Your personal balance sheet will stay clean.
The right way to think about this is that if your business were to go bankrupt tomorrow, the creditors would not come after you as an individual. The creditors would come after the corporation.
If you’re a sole proprietor or partner, it’s different. The creditors can come after you personally — not to collect from you directly but to reduce the amount they will get from the business. This is called “piercing the corporate veil.”
The problem isn’t that creditors are mean or unfair; it’s that they want their money back, and there may be legal reasons why they can’t get it from the business itself. This makes businesses try to protect their owners from personal liability by incorporating.
If you’re starting a company, there are two kinds of expenses you need to account for: business expenses and personal expenses.
Business expenses are just that–expenses that are related to the business. If you only have one company, then the line between business and personal is pretty clear–it’s whatever is directly relevant to your business. If you work out of your house, for example, then the mortgage payments are probably a business expense; if you use your home as an office, then electricity and heating are business expenses; if you go on vacation, then hotel bills are personal expenses. If you go out with friends after work, then dinner is personal; if you meet with a prospective customer after work, lunch is likely business.
If you have more than one company (or more than one job), then it gets trickier. When Apple was getting started in 1976, Steve Jobs was still living in his parents’ house, so he used it as an office. That meant that rent was a business expense. But his parents were still living there too–so food was a personal expense. In fact it was a *much* bigger expense than rent–so much so that his parents were worried about him being able to pay his share of the groceries.
If you’re a tech entrepreneur, it’s tempting to think of your business as a kind of extension of yourself. You work hard at it, after all, and its success is a matter of great personal pride.
It’s also risky. If your company goes under, it can drag down your personal finances with it. It can make you lose your house or your car. It can take you from being a successful entrepreneur to being a bankrupt failure, and that’s the worst thing that can happen to anyone in Silicon Valley.
It’s not just tech companies that have this problem. In fact, tech companies have the advantage of having been started by people who are trying to solve a problem they have themselves. Everyone else starts their company to solve other people’s problems, and so their business ends up being something different from their own lives in a way tech businesses often aren’t.
Many people think that starting a business is just like having a job, except you don’t have any bosses. I don’t think this is true, because I think the main difference is that you are responsible for your own finances. You decide how much money you want to make, and if you fail to do so, it’s your own fault.
This difference doesn’t seem very important when you are first getting started, but it can grow into a big problem.
Early on, other things being equal, it’s good to be able to use your own money to pay your expenses. If you do this, then if your business succeeds you’ll end up with more money than if you’d had to use someone else’s money. But if you use your own money to pay your expenses, then when the business fails–which is likely, since most businesses fail–you lose your own money as well as the investor’s money. So if other things are not equal–if there are better ways to use other people’s money to fund the company–then you probably shouldn’t use your own.
Even if you don’t want to be a professional athlete, you probably still care about your body. You might want it to be in good shape, and you might want to avoid doing anything that would hurt it. So if someone offered you a pill that would make you stronger and faster without any side effects, you might think that was a pretty good deal.
To a professional athlete, this hypothetical drug would seem like a godsend. It would allow her to train harder and recover faster. But consider what it means for the rest of us. If you take this pill, even if it doesn’t have any side effects, it will make your life worse in another way. Because once there’s such a thing as the Strength Pill, the best athletes won’t just be people who are born with bodies suited for their sport—they’ll be people who take the Strength Pill when they train.
In other words, this imaginary drug is problematic because it allows an arms race: everyone takes the pill so they can keep up with everyone else who’s taking the pill so they can keep up with everyone else who’s taking the pill…