She asked me, “How do you stop commingling your money and start operating your business the right way?”
I did a Shop Talk on one of the biggest mistakes that you can make in your business. It was all about commingling your money – that’s when you start a business and you mix your personal and business finances.
Not long after that post, I received an email from someone who said to me:
“I really, really liked your Shop Talk video blog on commingling your money. My question is, if you are someone who is doing that, what is the first step to fix it? How do you stop co-mingling your money and start operating your business the right way?”
Watch Facebook Live Replay – How To Stop Commingling Your Money
There are five steps you’re going to have to take to stop commingling your money and find your way through this financial maze.
The first step to stop commingling your money is to simply decide that you are committed to making this critical change in your business.
You must disentangle your business and personal finances and it won’t be easy. Sure, deciding sounds easy- but it’s not. There are often other people who are involved when commingling is happening.
Frequently, you’ll see this situation in family businesses – it may be spouses in business together, or siblings, or a parent and child. The problem is common to any situation where there is a mindset of using an “old school” way of running the business and they’ve done it for so long that making a change feels really intimidating and overwhelming.
That’s why the first thing you need to do is decide.
You need to decide collectively that you don’t want to run the business this way anymore, that you want to run the business differently and you want to separate your money out so that you know exactly what’s going on in the business.
This isn’t about not taking money out of the business. I’m all for giving yourself money to buy personal things out of your business, but you need to do it the right way so that it gets taxed accordingly and it’s all above board. If you don’t, and your business gets audited, having mixed all of that money mixed together could be disastrous. It’s possible it could bankrupt you, depending on how long you’ve done it and how big of a mess there is.
The second step is to be prepared to sit in your gunk. It’s uncomfortable. It’s vulnerable. It’s embarrassing.
Money brings up all kinds of weird emotions for people.
In my Money Mastermind program we talk about this issue in great detail. You’ve got to be prepared to basically sit with the mess you’ve made because you are going to go through a very uncomfortable process to clean it up. Uncomfortable – but worth it.
I use the Conscious Competence Model, and based on that model the good news is the first phase – this uncomfortable one – is that you simply don’t know what you don’t know. But, you can learn!
Initially, you are unconsciously incompetent but then all of a sudden you know – you become aware. You know that you shouldn’t be doing this with your money. With that realization, you are now consciously incompetent – phase two! You know that you should stop commingling your money and you also know that you don’t yet know how to fix the problem.Being consciously incompetent about money creates a lot of tension - you can change that! Click To Tweet
The third phase, as you start to work through your problem, is conscious competence. You need to pay really close attention to what you’re doing in order to be able to do it. For example, when people start tracking sales they’re usually really good at it the first week or so, and then they start to fall into bad habits. They have to consciously competent in order to develop the right habit to solve the problem.
The fourth phase is being unconsciously competent. It means you do what you need to do without even thinking about it. That’s where I am in my business – and every one of my programs, or opportunities to work with me, are geared towards helping you get to that place too.
I’ve got my habits so well defined in terms of how to manage money and how to manage the financial aspects of my business, that it’s now second nature to me.
But it wasn’t always that way.
When I first started my business my cash flow was a disaster because I didn’t understand sales, expenses, profit, and cash-flow. I didn’t understand the timing of how money flowed through the business and I almost bankrupted myself because of that.
The third thing you need to do is you need to find somebody to help you break it all down.
You need to build some competence around money and that means you need somebody to teach you what it is that you need to do to fix this. It could be a business coach like me. It could be an accountant. It could be somebody who specializes in business finance but if you’re going to hire a business coach to help you with this, I’ll tell you, you need to hire somebody that’s got a really good command of how to run a fiscally responsible business. Make sure you ask questions before joining a coaching program!
The fourth step that you’re going to want to take is separate your bank accounts and get intimate with the numbers.
Separate your business bank account from your personal bank account. If you need money from your business for your personal use, make a transfer. Transfer $500.00 from your business to your personal account and tell your accountant this is a draw or this is a dividend or this is a pay-check. Label the money transfers. Don’t use your business bankcard to buy groceries. Transfer yourself $300.00, $400.00, or $500.00 dollars and buy groceries on your personal card.
Keep those personal expenses out of your business account. Make sure you have two credit cards; one that is purely for you on a personal level and another that is only ever used for business expenses. You want to make sure that everything is operating separately and that you are minimizing the temptation to mix it all together. If you’ve got two separated accounts then it just becomes a practice that you transfer money from the business into your personal account and you label that money transfer. You don’t spend the money in your business account on personal things like it doesn’t matter – because it does.
The fifth step is taking a really good look at your current reality and that requires a lot of work and it requires effort and discipline.
Look at your sales performance over the last couple of years so that you can see what the trends are in terms of how much money is coming into your business. You also need to look at your expenses and identify which of those expenses are personal and which of those expenses are business and that’s sometimes hard to do. It’s critical you understand where you’re really spending money on your business and exactly how profitable it is.
You need to get a handle on your cash flow.
When you are spending money willy-nilly without paying attention to those details you don’t know what you don’t know. Chances are you’re scrambling at the end of the year to get everything together for the accountant because you haven’t run your business properly.
Get really intimate with those numbers and start tracking and determining exactly where things are at and then you have some decisions to make:
• Where do you want to go?
• What do you want your business to look like?
• How much do you want to pay yourself?
• How much profit do you want in the business?
• How much do you want to sell?
• How much do you want your cost of goods to be?
• Is your cost of goods too high/low?
You need to be able to look at the data and consciously make decisions around how you are making and spending money in your business.
When you’re co-mingling it all together you make it really difficult to be able to do that. You might not even be able to do that with confidence until you separate things and start looking at your money with a more critical eye as you move forward.
You take a good look; you start tracking it all and develop solid habits:
• Track your money weekly.
• Log into your bank account daily.
• Know how much money you’re spending.
• Know what’s on your credit card.
• Know what your cash flow situation is.
• Know what your accounts receivables are.
• Know what money you need to pay and when you need to pay it.
You have to decide that you don’t want to run your business this way anymore and then you can do all of the things that I have talked about but it starts with the first step. Deciding that you don’t want this mess anymore and then committing to doing the work that is required to clean it all up.