Book keeping “faux pas’s” entrepreneurs make

Let us address the issue of mixing personal funds with corporate funds in company accounts inadvertently leading to the ‘cardinal sin’ of blurry and inauditable company accounts. Years ago, when I started running my corporate communications and branding business, I used one checkbook for all my needs. Talk about an auditor’s nightmare! As the business grew, so did the extra check leaves that were issued to take care of other Soon after needs that had nothing to do with growing the business.

Soon after, a close friend of mine attended an interesting and revealing entrepreneurship program at LBS sponsored by Diamond bank. At the end of the training exercise, she called me and said, “Muna, we have goofed!” Talk about a total deflation of assumed entrepreneurial experience, importance and pride in ignorance. I leave how I felt when the call ended to your imagination! The important lesson I took away was never to mix corporate and personal income. EVER!

The simple truth is that most of us have innocently made this mistake. Seasoned entrepreneurs might vigorously deny this, but I am sure that 90% of us have made this beginners mistake when we first started growing our businesses and if I probe deeper, there might still be a couple of us who are still making it!

This unholy practice is very bad for the business primarily because it could easily lead to the erosion of critically needed funds required for the growth of the nascent business. The income from the business is supposed to be re-invested back into the business at the early stages of the life of the business. Using income generated from the business to solve personal problems will either strain the organizations liquidity or drive the business into bankruptcy. Simply put, it is not professional conduct and will ultimately lead to a litany of avoidable complications!

Many entrepreneurs have fallen into this trap early on in their journey into entrepreneurship. Sometimes, due to urgent personal needs they have had to dip their hands into the business coffers. This they justify either as an I.O.U or with the mindset of ‘its still my money” or “I and my business are one.”

This is an inevitable mistake owner manager’s make and will still make so long as there are new businesses springing up and not enough capital to go round.

So, I will share the five rules that helped me many years ago after that phone call to straighten my books.

1) Keep separate accounts for your business and yourself.

2) Keep detailed records of all business and personal expenses. It is important to keep this separate too. If you are just starting out in business, and cant afford to engage a full time accountant, you can use a simple excel sheet for this or engage the services of an auditor who comes in every fortnightly or once a month to put your books in order.

3) Put yourself on a salary

4) Practicing the six Jars formula (More on this next week)

5) Stay focused and disciplined in the face of financial pressure.

This is the ultimate test. Will you pass or fail? I would like to hear about your experience and how you have managed or are still managing to separate your corporate and personal accounts.