Tracking Your Business Life and Personal Life
I saw this infographic from TD Bank® on Small Business Trends the other day about and it surprised me.
Here is the link to the information they shared about a survey they had done asking small business owners about their bank account.
27% of those surveyed used the same bank account for both business and personal
I’m sure a lot of those people just feel it’s easier to have one bank account. In the long run they are just asking for trouble. I did a podcast episode on this called Stay Out of Hot Water: Keep Business and Personal Records Separate. The link is here if you would like to have a listen.
In it I explained many reasons why you should not comingle your business and personal information. In the episode I was concentrating a lot on records in general but the first place start is your bank account!
If you are part of the 27%, here are a few reasons why you need to rethink your approach:
- Legal – your legal entity can be challenged in a dispute. Comingling your personal and business finances can give rise to the idea of “piercing the corporate veil” and create unexpected liability for you personally. You can read more about it here. The combining of business and personal finances is a bad idea.
- Liability – this idea of piercing the veil can place a lot of risk on you. Let’s say you perform a service for someone in their home. Let’s say you do something wrong and it leads to damage to the home or injury. If you had them pay you personally, who do you think they are suing for the error in workmanship? You and your business!
- Creating a red flag for taxing authorities. The IRS looks for red flags while they are auditing a business or a taxpayer. If you run a small business there is a higher chance that you are audited than if you didn’t. During an audit, if the auditor discovers that you use the same account for both, it opens up a lot of questions. Chances are they may review the deductions that you’ve claimed. It’s not worth it; separate your business and personal financial accounts.
- Professional Reasons – From a customers’ perspective, most people like to do business with a business, not someone who is running a hobby on the side. Having them make out checks to you personally can send a message that you are running a hobby. It may trigger a question in the customer’s mind about how serious you are about your business and the service you provide.
- Sanity Reasons – If you hate getting your tax information together, part of the reason may be that you have created a mess all year long. You have to sift through personal expenses, many of which are not deductible, to get clean financial information about your business. That takes a lot of time and energy and you may make some costly mistakes.
What You Need to Do Instead
Start to get this under control now to limit your exposure. First, open a separate business account. While you’re at it, open up a separate business credit card account if you don’t already have one for your business.
Your financial records will be effectively kept at the “transaction point”. For example, if you have to make a purchase for your business, the business credit card receipt or the check you cut out of your business accounts is evidence of the business transaction. Your new business accounts receipts and cancelled checks act as business records.
Don’t deposit business checks into your personal account. If you need to take money out of the business for your personal expenses then take a salary or take a draw. More importantly document the transaction in your business.
And finally, don’t pay personal expenses with your business credit card or bank account. As mentioned above, take a salary or take a draw and document it.
It’s Just a Bad Idea
Combining your business and personal accounts is just not a good idea. It opens you up to too many negative risks in your business that can prevent the success you want for your business life and personal life!
“Our largest customer just told us that they’re going in a different direction and don’t need us anymore!” – VP of Sales
I’ll never forget the look on that executive’s face. Shock, disbelief and fear; deep fear.
Almost 50% of our sales were going away. A customer that paid us for our services, month in and month out for about 15 years was gone, just like that.
And with that, a few years of struggle began for the company that I had just started working for less than two years before. Replacing that amount of sales was going to take a while.
How can companies avoid this? Is there a way to, at least, reduce the risk of it happening to your business? What things should you look for in your business to make sure the same fate doesn’t happen to you?
Five Reasons Your Sales Numbers Are At Risk
Dependent on a Few Customers
This is what happened to my company. We were moving happily along with this large international customer providing them technical services for 15 years. During our business relationship, we worked hard and gave them very good service. Since they were by far the biggest customer, they got a lot of our attention. Sure, it was great to have a customer like that; the sales came in like clockwork. The problem was that we didn’t do a very good job managing our sales and marketing to be less dependent on a few customers. Because we hadn’t grown enough, the loss of that customer was a huge problem. When we got the news, it was like a death in the family.
Industry / Economic Changes
I think we all understand how the economy can affect sales because we’ve been living (and struggling) through it the last several years. Industry changes can be a little different depending on your own industry. For example, in construction, the industry shifted when the traditional single family home gave way to the even larger houses a few years ago. Now, something called “tiny houses” is gaining traction in some regions. For restaurants trends like “fast-casual”, mobile ordering and even rising food costs are changing the landscape for the industry. Technology has affected many industries especially in media where digital music, streaming movies, and online media are doing a number on the music, Movie Theater and newspaper industries. Industry and economics can put your sales at risk if you don’t keep up and adapt to the changes.
Commoditization puts sales at risk too. Many products became commodities over the years and some have even become “un-commoditized”. A commodity is a product or service that is mass-produced, with relatively little variation and is widely available. Since it’s widely available with little variation, consumers will be more price sensitive. Think sugar. You typically don’t care about the brand, you just need sugar to make cookies or sweeten your coffee. Coffee was another example until Starbucks®, gourmet coffee and K-Cups came along. Now, stroll down the coffee aisle in any grocery store, there are multiple flavors, strengths and brewing methods to choose from. When I started drinking coffee in college there wasn’t much choice – coffee was coffee!
Competition puts additional risk on your sales. There is always someone out there who will compete either directly or indirectly with your business. Direct competition competes on product or service, price and convenience. Direct competition tends to have similar overall business goals. Examples in the restaurant business might be McDonalds® vs. Wendy’s®. Indirect competition will compete with similar products or services but may differ in its business goal. Indirect for the restaurant industry might be McDonalds® vs. TGI Fridays®; you can get a hamburger at both but they have different business goals as well as variations in the products they offer. Replacement competition offer similar products and have similar business goals but may be different in the way they reach that goal. One example that has changed an industry is the digital camera; this replacement competition has all but put the film and film camera industries out of business. Knowing who your main competitors are and what their strengths, weaknesses and goals are will benefit you when trying to ward off the competition.
Your Own Company
The last reason your sales could be at risk may be what you’re doing or not doing. It is easy when you’ve been in business awhile to forget what got you here and what differentiates you from other businesses offering the same product or service. Customers change and what they value can change too. If you’re losing sales, it may be that you need to look inward to make sure what you offer still provides your customers the quality, value and good service that got you customers in the first place. Letting any of these slip can create an opportunity for customers to look for competitors to fill their needs. Listening to your customers and prospects can also help you make improvements so that you stay competitive and on top of your game.
Now that we’ve identified some of the reasons that your sales are at risk, let’s look at some things you can do to combat these in your own business. Here are some things that you can consider:
In the company that I worked for they didn’t try to expand until after they lost their biggest customer. For us, we relied too much on one customer, so we increased our sales efforts to capture more customers and generate more sales. We also created a new product that added brand new sales and reduced our reliance on one customer. Expanding can include increasing your geographic region, offering products in a new previously untapped market, or focusing on growing a specific segment. As a result of our lost customer we also implemented a sales management tool that helped us focus more on where our sales were coming from, showed us how concentrated they were among our customer base and also helped us better forecast future sales. Growing and expanding your customer base can not only increase your sales, but also make you less reliant on one or even a few customers.
I mentioned that we offered a new product, but it was already technology that we had in-house. Our innovation involved an effort by product management to get the technology ready for sale to complement our existing customer base. Creating a new product or even a new service that complements your current product or customer base is a way to grab a tighter hold and ward off competition. Another way to innovate is to find a new way to deliver your products or services. We see that in the music industry with things like iTunes®. Amazon® revolutionized retail with its easy order and delivery model and locally I see it with restaurants grabbing sales by delivering food to the beach. Another way to transform and innovate is how you engage customers to aid in obtaining feedback and improving your products and services. Customers can provide a wealth of feedback that was very difficult and expensive to collect before social media and the internet.
Packaging is another way to stand out from the crowd. Bundling your product or service with something else can set you apart from the competition. Packaging your products with a warranty, service contract or some other offer can help differentiate you. Cable companies and wireless carriers offer bundles at lower prices to capture more customers and make their product “sticky”, as customers rely on them for more and more services. Some restaurants have bundled too – think value meals and free refills. Computers have been bundling software for years and airlines and hotels have also teamed up. Even my auto insurance company bundles a roadside assistance in with my policy, which allowed me to cancel my stand-alone roadside plan.
Keep Your Risk Low
It was almost 20 years ago that we lost that customer and I still remember it like it was yesterday. It was a difficult time but we managed to bounce back and grow even larger. Business has many risks and one of those risks could be lost sales. Part of your business management plan should be to keep an eye the risk factors that exist in your business. Listen to the market, the industry and don’t forget your customers too. Take steps to manage your risks to keep your sales levels where you want them.