I heard a story about co-mingling funds from a fellow bookkeeper this morning, just before I wrote this.
A prospective client added 18 bank accounts to his accounting software account. These accounts included his business bank accounts for multiple businesses, his personal bank accounts, his personal investment accounts. We don’t have a name for him, so let’s call him Rob. Rob Self, engineering consultant.
What Rob did is a form of co-mingling funds, and it is bad.
Here’s why Rob Self is screwing up, big time:
- He learns nothing from his reporting. When he goes into QuickBooks (for example), and he runs a profit and loss on his consulting business for the month, what will he see? Will he get an accurate report of the consulting business? Or, will he see the income and expenses of many transactions completely unrelated to his consulting enterprise?
- He is overreporting or underreporting his income or his expenses. If he over reports his income to the IRS, he will be paying more taxes than he needs to. If he over reports his expenses, it could look like fraud. If that leads to an audit, he’ll need to do his books again correctly and pay fines in addition to the taxes he owes. It’s lose-lose.
- His personal assets may be exposed in the event of a business-related lawsuit. Rob may be smart on legal but foolish in bookkeeping. He put his business under the protection of a corporate veil, keeping his business assets in the company’s name while keeping his personal assets outside the business. But if he is reporting to the government his savings account, his home, and his investment accounts on his business reports to the IRS, what is a judge supposed to think if he gets sued?
Co-Mingling Funds No More!
If Rob Self came to me, or any other decent bookkeeper, here’s what we would recommend:
- Use a personal finances tracking software or SaaS, like Mint or Quicken, for personal expenses. Quickbooks, Xero and the like are not the ideal tools for managing personal accounts.
- Use a separate account in QuickBooks for each business. If Rob’s engineering consultancy is mixed with his weekend DJ income, he’ll get accurate reporting on neither. If he doesn’t want to choose, he can either get one account for the business he needs to track the most and do the other manually. or
- Hire a bookkeeper. He can make a deal with a bookkeeper who can give him a 30% discount on QuickBooks (like me) and negotiate a reasonable fee to take on both businesses. With one bookkeeper handling both businesses, it may be worth his time and money.
These decisions will help him see the truth about both his businesses, better protect his personal assets, and keep him on the up and up with the IRS.
Finally, co-mingling funds can be using a personal bank account for both personal and business expenses. Every time you look at an expense, you have to figure out what it was for. Or your bookkeeper, who initially will know less than you and have many questions, especially in the beginning. Just get a business bank account. It will save you time and energy if you’re doing the books yourself, and it saves your bookkeeper time and energy when helping you, especially as your business grows.
To have me as your bookkeeper and start saving 80+ hours per year of time, schedule a free strategy call here.