Q: As the agency owner, should I completely separate my personal finances from the agency’s finances?
Yes, yes and yes! Absolutely yes.
Q: Why? Isn’t the money still mine either way?
You’re right, it is! But keep in mind:
- Agency valuations are typically set as a multiple of EBIDTA. The inclusion of personal expenses decreases the long-term value of the agency!
- In the event of a sale, at the due diligence process, these personal expenses will have to be disclosed so true EBIDTA can be calculated.
- Inclusion of personal expenses distorts true agency results. Separation maintains the accuracy of financial records – especially as time goes by and the transaction details are forgotten.
- When personal expenses are included, financial benchmarking becomes inaccurate and misleading.
- Inclusion of these expenses demoralizes the efforts of the agency’s team – especially as the details of these transactions will be known to some. Which also complicates the agency’s bookkeeping and relationship with the CPA.
- Keeping finances separate will avoid future tax burdens and penalties.
- There’s a high chance your personal liability will no longer be protected.
Q: Ok, I get it now. So, how do I keep them separate going forward?
Great question! Luckily, there are best practices for separation of finances. Here’s what we recommend:
- Pay yourself through payroll!
- If additional money is needed, take it as a shareholder distribution and record it properly.
- Keep business and personal bank accounts and credit cards separate.
- Implement a receipt tracking process which includes all relevant information if future reference is needed.
- The agency is not a bank. Don’t use it for personal or other loans.
- When in doubt, reach out! Ask for guidance from your CPA / financial consultants to ensure you are on track to maximize tax advantages while minimizing the risks of exposure.
To learn more about financial best practices and maximizing your agency’s finances, please contact: Don Polczynski, ACFO at [email protected].
Download a printable copy of these tips, here.
Thanks for reading!
Be Financially Well,