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Small Business Finance Basics: QuickBooks & Beyond

Lesson 16 of 37

Separating Business from Personal

 

Small Business Finance Basics: QuickBooks & Beyond

Lesson 16 of 37

Separating Business from Personal

 

Lesson Info

Separating Business from Personal

So this segment is called separating business from personal transactions that I'm gonna click on the slide. So I've got my bullet points here of some things that I'd like you to think about initially here. Gonna make sure my phone's off it. ISS So why do you need to separate? I think I covered that in the last segment. One of the reasons you need to sex or separate business from personal is because of legal liability issues. There's a term out there called piercing the Corporate Veil, which is a fancy way of talking about the idea that if you have a corporation and you co mingle the business in the personal activity, particularly in a checking account that someone who is pursuing you legally could say, Well, look, their intermingling, their transaction, there really is no difference between their corporation and their personal assets. Therefore, they're one in the same legally and again, this is stuff for an attorney, but it means that if somebody slipped on the floor and fell outside ...

your pizzeria and you were a corporation, but she were mixing the business and the personal transactions, a judge might say, Well, your personal your business with same. Therefore, all your personal assets are up to grabs in a legal matter. So that's called piercing the corporate veil, which is kind of a legal business law term. Now we got to attach some accounting to separate those records. And in the who gets what discussion? Last time we'll talk about Well, which responsibilities go where I'll do more on that. And then I'm gonna tell an unfortunate true story about something called a fictitious payee that happened to a client of mine before I worked with them that ran a tree service company in ST Louis. It's kind of a cautionary tale, all right, so first of all, why the need to separate? And I'm gonna pull it my notes here as well. There is a legal issue for separating, but there's also just plain old accounting, profit and loss issues. Okay, here's what I mean. This is a case of you starting a business, not separating your records and getting so far down the road that it's tough to separate stuff after the fact. For example, you've got a checking account, you start a sole proprietorship, and at the time you decide I'm not gonna separate my records. I'm gonna use P for personal. I'm gonna use B as in boy for business. Be used to be us for business. So one checking account, you write a check, It's personal. You write a check, it's for business. Now, here's what happens. It's a good problem to have your business starts to ramp up. So suddenly checks that you're writing for your business go from a couple checks a week to 10 a week and deposits, hoping that you're getting from your clients go up from five a month to 30 a month. And so what happens is as you're riding Mawr and Mawr and Mawr checks mawr and more of them become business checks. And Maura Maura of your deposits become business deposits. I'm gonna be by deposit, which is a good problem that have, because that means that you're doing a lot of business. Good problem to have, However, if you're in this situation and later on, it's tax time. And what's your accountant going to say to you? Can you separate out all the business activity that's in your personal account? I can't say the number of times that I've had to deal with people who've had to do this. There's a couple of risks. The first is Maybe you don't pull out all the deposits, so your income, your revenue and sales is too low in your accounting records. Maybe you don't catch all the checks that you've written, so you show a whole bunch of revenue and far too little income on far too little expenses because you didn't catch all the checks you wrote, and you end up paying tax on a profit. That's too high because you didn't pull out all the expenses. There's a whole bunch of reasons why, why this issue can be a real problem. Okay, so there's a practical reason why you should do this, not only because of the legal liability that I mentioned earlier, but also because it's just tedious and time consuming to do this. So that's a reason. So that scenario I have that Sarah starts image photography. That's the business that we see on QuickBooks. She uses her personal check book for three months, so you could imagine if business starts rolling. This is gonna be a lot to separate after three months, so I just want you to consider that there's not only a legal issue, but there's also a practical time Eat up your time kind of issue. Okay, so what do I do suggest? Well, this goes back and relates a little bit to something that we did in her prior segment. I'm gonna connect some stuff we did in a prior segment. It's kind of organizational, administrative, but it's important you start a sole proprietorship. As we mentioned in business formation. You go to the secretary of state and you register a fictitious name. Okay, let's say it's Riverside Photo. Why don't I go through this? Because once you get to this step, you can now go out and get a checking account set up. So here's Sarah, our photographer. Over here. She's got her personal checking. Riverside is gonna have their own business account. Two bank accounts. Okay, there's a practical problem, and part of this is just personal kind of organizing yourself. Many business owners that I know or carry around checkbooks for both business and personal and carrying around bank cards, debit cards, credit cards, both business and personal. You just have to discipline yourself to take a minute and look at What's check your accounting? Your you Which checking account you're using. Which reminds me of a story that happened to me Tuesday morning. I'm gonna fly to San Francisco, and I'm super psyched to do my creative live show. So I'm kidding with the guy at the counter, and I'm not gonna name the airline because you know where the story's going. I'm kidding with the guy at the counter and hands me my boarding pass and off I go and I get lucky. And I get in that TSA pre line the short line, man, things are going great. And I hand my idea my ticket to the guy and he hands it back to me and he goes, This ticket is not for you. This is for somebody named buyer. Your name's Boyd. If this is not your ticket, so I go back up. I have to because I never looked at it cause I've got handed it to me. So I go up and I gotta get my ticket change in global block. It takes himself discipline to do this. That is, it takes self discipline to use the right debt credit card to write the check out of the right account. It's just something you got to kind of except and learn to do. Okay, so that's my suggestion on separating the accounts. Okay, now there's an accounting issue here that goes beyond administrative. So I said on the Why the need to separate? There's a tax issue, business transactions in your personal tax return. What we learned in the last segment is, and this is worth repeating because it's kind of complicated. You've got a personal tax return, you've got the income section of that return. One of those lines is for your business, Riverside Photo. So I'm gonna put $10,000. We're recite photo profit. This profit is Onley correct. If you've been diligent about separating those business and personal transactions, it is only correct if you keep them separate. There is a personal financial impact to you if that number is wrong, because that's the number you're paying taxes on. So let's make it's worth the effort is what I'm saying. To get this right, Okay, Personal assets separate from legal liability. I've covered a few times. So who cares? Can this So what? So I use a personal checking account and I separate bruises from business personal at the end of the month. So what? Well, let me take a step further. Another need to separate records is to generate accurate reports. Now we've been putting stuff into quick books. Who needs the reports? Here's the new point. And this gets back to something that Jackie O was talking about yesterday, which is, Well, let's look down the road and talk about venture capital Angel, you know, and you got to kind of put your best foot forward. All right, who needs reports? Besides, you says on the screen, investors, there's gonna be two problems if you do this co mingling. First of all, if somebody's willing to invest in your photography business is somebody because says and comes to you and says You've got a lot of talent But I can see that you need another investor to come in and put some money in so you could buy more equipment and I'm gonna help you do that and you say Great. Obviously, he wants to see your financial records. It's gonna look pretty unprofessional if you've gotta spend a week separating your business and your personal transactions because you don't do it until the end of the quarter of the end of the year because you never have Somebody might approach you and say, I'd like to invest in your business so you got to kind of be ready for that is my point. A reason to separate business from Personal a lender commercial banker. He's gonna want to see some accounting records, a financial statement. Let's not. And I've seen this happen. I've seen people who need to get capital and want to get a loan, or they have. Somebody approached them about being an investor, and they literally have to put the entire thing on hold while they separate business from personal transactions. So please don't do that. Please keep that in mind. A new business partner, new business partner. You can imagine that the fact that you're not separating business from personal transactions doesn't reflect on the business owner. Well, if it's a new partner because to be blunt, it gives the impression that you're not maybe not professional or that you're not taking this seriously or you're maybe you're just a little out of control, Okay, that's what I'm getting out on this partner thing I'll give you an example as someone who is a business owner who's approached by somebody else. So I got approached by a guy who is creating a new online education company and not that I'm any kind of big deal. Let's not want me. And he wanted to talk to me about using my YouTube content of the things that I've done in combining etcetera, etcetera. Great. So I asked the guy, You know, I need to understand some basics of your business plan on where you're going. I'm going to sign a confidentiality agreement. Absolutely sure you owned that the idea. But before I spend a lot of invest a lot of time talking with you, I'd like a little You know, I'd like to know where you are and the guy wouldn't send it to me and, you know, he said, Well, you know, that's for investors. And I said, Well, yeah, if I'm a partner, I'm an investor. And so I'm I wish you luck, but I'm not really interested because my intuition, my impression was maybe the guy doesn't have a business plan, so you can see that's how a partner might reflect on a business owner. Maybe they don't have their act together, and that's what I want to avoid for the creative folks out there in the audience is, I understand it's accounting and it's not. It's not as critical is your work, but it gives the impression that you kind of got your act together a little bit without becoming an expert. So those are people who need your reports. So I used the example of my friend who's got the catering business and a restaurant wants to invest, and they want to see, you know, what profit have you made historically, How much in sales have you done? What kind of equipment did you have to not only make the food but deliver it to clients, that kind of thing. How much expenses have you incurred for hiring staff? You know they want to see the picture again. I would insist on somebody signing a non disclosure agreement, but you're not going to connect with these people. If you're not separating your records is my point. Okay, if you come away with nothing else from this class, this might be the most important thing, and it really doesn't have to do with QuickBooks. But this is so important duties that you you should separate. Accountants call it segregation of duties. This is an instance. Were you assigned to different people things that you do in your business from an accounting standpoint, when possible? Now I realize if you're on your own, if you're like me and your one man band does not applicable, the problem comes in when your business is growing and you're at that point where you have to hire that first employees or employees plural and in your euphoria and in your hurry. You don't think this process through and problems happened. Where possible. Assign the work to different people. Now what or the duties were talking about custody of assets? The first bullet point who physically has the checkbook? If you're a plumber and you have five trucks and a whole bunch of equipment in a warehouse, who has the keys to the warehouse? Who can access if you got inventory? Who can access the inventory, the physical assets that you own? Who has access? Who can change your website? That's not an asset we necessarily put on the books, but that's important. Who has access to your website Custody authority to move assets. Who can sign a check? Most companies have something in place where, above a certain dollar amount. There needs to be two signatures on a check. That's a really good idea, because then it take, you know, and then we gotta think a little more. We have to signers on a check over a certain dollar amount. I'd recommend that who can write a check? Sometimes he will have custody the assets. Maybe it's the administrative person at the front desk has the checkbook in her drawer, but she's not authorized. Signer. Never, never, never, never, ever let your accountant have acts that never let your accountant be a signer on a checkbook. Ever, ever, ever, ever. Don't let an accountant have authority to move assets. You're gonna find out why in a minute and the final is the record keeping records. Who has access to QuickBooks now? We found out earlier that you can have multiple users for QuickBooks. That's cool, but you need to be aware who who can actually make transactions. You may want to set up something where, even though you have a bookkeeper and accountant who has access to QuickBooks that you review their activity, that you review their activity. All right. Three things. Custody of assets, authority, move assets recordkeeping. Now, this sounds like business school, administrative stuff, But it's really important. I'm gonna give you several examples in addition to the one that I have on the keynote of what can go wrong here. Okay. Questions on that before I go on that basic statement. Okay. My friend Dave I took talked to this morning in my super cool hotel room referred me to a guy 10 years ago who owned a tree service company. I'm changing the name to protect the innocent. We're gonna call it Green Green Rivers Tree Service did about $600,000 a year in sales. You had the owner who was going out and making estimates. You had a person in the office who was handling the accounting and scheduling and dispatching people. You had crews. The owner would take out crews to go do the work and a manager would go out and do and would do work. Okay. Anybody had a tree? Take it down at their house lately? Yeah, So they show up at your front door. Did you give you an estimate? Yes, they show up. They got the clipboard that give you the estimate. So the owner and the manager managing another crew to Cruz would give people estimates. A nearby town has a storm about 30 miles south. ST. Louis. Big storm. Lots of trees down. Owner, Sin's manager and a crew to go to work down there. Boy, they got all kinds of work. Lots and lots of trees to be removed. Taken down. Sends the crew down. Dispatcher gets calls. They send the crew down. Cruz, come back every day. Figure out what equipment they need for the next day. They've got all these estimates in the hands of customers. The dispatcher schedules all these jobs out of town. Off they go, doing all the work. Shortly. After all, the work's done, the manager supervising the cruise in the nearby town suddenly quits. Yeah, week goes by. None of the payments air coming in from the work performed out of town. Owner decides. I'm going to take the guys who are on the crew that worked on those jobs down to the town and figure out what what's going on? Nobody's getting. Why am I not getting any checks? He starts showing up in people's houses. The cruise, they've got down the addresses. Cruz said, Yeah, we took out a stump there and we took down a tree there. They show up and start talking to clients. Yeah, they did the work. I paid you guys. Well, how what? Finally, one of the customer shows them the invoice that they were handed because the manager who has now quit had authority to not only do the s but but hand the person an invoice. And they had a stack of invoices that were not numbered. A stack of invoices, templates that you could fill out a hand to customers. What the manager was doing is it turned out he was handing the customers invoices for a slightly different company name and an address and appeal box that he controlled and a checking account that he controlled. And he stole $50,000 worth of business for a company that only did $600,000 a year total a year, $50,000 gone. But the guy stole and a stone. And as soon as he build everyone and invoice him and he knew that they all had the invoices in their hands. He quit the business. Now I walk into this after this has happened. And my friend, the owner says, You know, I've got an attorney and I could go after the guy, but the attorney fees would beam or by the time I get to the end of this than the 50 grand I lost, so I'm not gonna pursue it. So I just lost. Not only did he lose the all the revenue, but he also lost all the spending he did to get the revenue. So we actually lost twice. He lost the $50, in revenue, and then he lost all the cost to generate the $50,000 in revenue. So if he cost him 40,000 make 50,000 you lost the 50,000 revenue and he lost the 40,000 expenses. That's $90, for a guy that's billing that has revenue coming in of $600,000 a year. That's 15% roughly of his business, his cash crazy. More than that, this really happens, and it happens because too much responsibility is given to someone and business rolls along and things were going great and you don't really think it through if you in a major city like this or where I am. If you read the paper local section of the newspaper every week, you'll read about this happening every week guarantee.

Class Description

Accounting can be easy if you know how to use the right tools. In this course, Ken Boyd offers an in-depth introduction to the accounting and QuickBooks skills that are the foundation of every thriving small business.

Learn QuickBooks Online

Ken covers everything you need to know about understanding and managing your business’s cash flow to insure that your business stays profitable and that you have the right amount of money at the right time. You’ll explore the principles of making sound business decisions that both grow your company and protect your bottom line. Ken will also cover best practices for integrating QuickBooks as an accounting tool, from setting up payment and invoicing systems to generating accounting reports to paying your company’s bills, and much more.

Whether you’re a first-time entrepreneur ready to learn the basics or a long-time business owner looking to sharpen your skills, this course will give you the tools you need to confidently manage your company’s finances -- no stress or guesswork required.

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