Mixing your personal and business funds can be devastating for your practice and your private life. Yet keeping them separate—and fixing a financial mess—is surprisingly simple. By Shane Conroy
Mixing personal and business expenses is a common problem among dentists who are new to practice management. Yet failing to keep them separate can be devastating to your practice’s financial standing, and cause serious headaches for your own personal finances.
“The most important reason for dentists to keep their personal finances separate from their business is for simplicity and administrative ease,” says David McKellar, director of Allied Business Accountants. “Failing to keep your finances separate will increase the time and effort you need to put into the administration of your business and—if paying a professional bookkeeper or accountant—it will cost you more in fees, as each personal transaction will need to be processed and categorised as such.”
Why you need to separate your finances
Separating your personal and business finances is the first step to good financial management of both your personal and business finances, and will allow you to budget and manage cashflow appropriately.
In a worst-case scenario, bad financial management may lead to missed or late payments that may negatively impact your personal credit rating, which in turn has consequences for your practice and may limit your ability to finance the future growth of your practice.
“Typically, small business owners need to provide guarantees for their business’s credit facilities,” says McKellar. “This could be a credit card or overdraft, a trade account with a supplier, or even a lease on a commercial office. If the supplier undertakes a credit check as part of their account opening process, your application could be rejected.”
And if your business takes a hit, your personal assets could come under threat.
“On the lending side of things, you want to keep the family home out of the mix as best you can so that the practice can stand on its own,” says Scott Davis, director of Williams Davis Chartered Accountants. “That way if things go sour, your family home is still as safe as possible.”
And if you’re operating through a company or trust structure, you may have an obligation to shareholders or beneficiaries to keep the business finances separate, says McKellar. “It may also impact the protection that these structures can provide in the event of insolvency or bankruptcy.”
Mixing your business and personal finances might also hide poor cashflow in your practice by blurring the line between practice income and your private savings. On the flip side, “you could be masking high personal spending by using practice funds”, says Davis. “That means when BAS and tax payments are due, your practice may not have sufficient funds available.”
Common pitfalls to avoid
Despite the serious consequences of failing to separate personal and business finances, it remains a common problem for dentists. For some, it can be as simple as making the mistake of using an existing personal business account for practice finances in order to avoid paying extra fees on a separate business bank account.
“When you first graduate, your financial affairs are simple. But once you start running a practice you need to adopt more of a business mindset … to act almost as if you are running the business for someone else.”—Scott Davis, director, Williams Davis Chartered Accountants
“If this is the case, you need to keep looking as there are banks and financial institutions that offer fee-free business bank accounts,” McKellar advises.
Time-poor dentists with little business management experience may also fall into the trap of focusing on the bigger-picture branding and marketing, while neglecting the less glamorous details of financial management. To remedy this, Davis points out the need to take an objective approach.
“When you first graduate, your financial affairs are simple. But once you start running a practice you need to adopt more of a business mindset,” he says. “That is, you need to act almost as if you are running the business for someone else.”
Fixing messy finances
Keeping your personal and business finances separate is actually very simple, says McKellar. Start by opening a separate bank account for your practice and link a debit Visa or Mastercard to that account.
“All your practice income should go into that account and all business-related expenses should be paid from that account, or using the card linked to that account,” says McKellar. “And if credit card loyalty points, or just using credit, is important to you, get a separate business credit card to use for business purchases.”
Davis also suggests dentists seek professional advice when seeking financing from lenders to ensure business loans are kept separate from their personal finances—and vice versa.
“Where finance products are involved, it’s good to get an independent set of eyes to review loans and see if they are still the best on offer and if a change is required,” he says.
If all else fails and you feel that your business finances are in a mess, both McKellar and Davis emphasise the importance of facing up to the problem and taking immediate action.
“Draw a line in the sand and separate all transactions from today going forward. It will take time, but can’t be avoided,” says McKellar.
“Put your hand up straight away and go see your accountant and finance broker. If you approach the ATO and your bank, you can usually get a solution which gives you time to dig yourself out of trouble,” says Davis. “However, if you put your head in the sand and wait for them to come after you, it may be too late and you’ll have to accept whatever solution they impose on you.”
How to repair your personal credit
David McKellar explains how to repair your personal credit record in four steps:
Step 1: Obtain a copy of your credit file and check its accuracy. If there are errors, you can take steps to have these corrected or removed.
Step 2: Pay any amounts that are in default. Credit files note if defaults have been paid or remain outstanding, so paying defaults may go in your favour if another credit provider is assessing your credit worthiness.
Step 3: Pay ongoing bills and loan repayments in full and on time to avoid new defaults of listings.
Step 4: Wait it out—defaults and listings on your credit file only stay there for five to seven years, so give it time and you will have a clean credit file again.