The decision to start your own massage business is exciting. You have completed your educational requirements; you have hands-on experience; and you have clients who need your healing hands.
Congratulations! Welcome to the world of entrepreneurship.
There is a sense of pride and accomplishment in knowing that you can now make your own decisions and your own schedule. No more asking for permission. You get to set the tone of your massage business, create your logo, design your shop, market your business the way you want and so much more. You are the boss.
Most of my clients say starting a business was one of the best decisions they ever made. Being an entrepreneur myself, I am happy I made the switch from employee to self-employed.
However, entrepreneurship has its challenges.
As fascinating and wonderful as it may be, becoming an entrepreneur comes with a full set of responsibilities: ethical responsibilities, responsibilities to your clients, legal responsibilities and financial responsibilities, just to name a few.
The purpose of this article is to highlight critical financial responsibilities for new massage therapy business owners.
The most common money mistake I encounter with new business owners is what is called “co-mingling of funds.” Co-mingling of funds is defined as using one bank account for both personal and business needs; it also encompasses using business funds without providing supporting documentation that expenses are business-related. It is a best practice to keep one bank account for your business and a separate bank account for your personal funds.
When I bring this money mistake up with new business owners, I am often asked the questions highlighted below.
Why is a Business Account Important?
The process of setting up a new massage business can be overwhelming, and a task like getting two separate accounts may easily get overlooked. To most new business owners, it feels like one more project to add to their already long to-do list.
My response to this question is always the same: If you do not separate the two it becomes difficult, if not impossible, as time goes by to distinguish your personal expenses from your business ones.
While you can take the time to try figuring this out, you have better things to do with your business―like running it. You will also have a hard time figuring out deposits and where they are coming from. Was that recent deposit a cash gift from a family member or was that money from a client purchasing services?
Remember that you and your business are two separate entities. For all intents and purposes, you have two lives: a business life and a personal life.
Many massage therapists start their businesses on their own, relying on money from personal savings. Sometimes you may be fortunate enough to have other sources of funding, but by and large most of my clients have used personal savings to start their businesses. Most of these funds are used to pay for expenses that occur before you even have your first client, such as equipment and supplies.
With so much going on in your new massage business, will you be able to remember personal withdrawals, business expenditures and deposits from five days ago, five weeks ago or five months ago if everything goes into the same account?
I doubt it.
Transferring the money needed into your business account allows you to keep track of how much you are spending without playing the memory game.
Being proactive in this manner will save you time down the road when you need to review your financial statements and organize your financial records for tax time. As a business owner, it is easier to be proactive than reactive.
Separating personal and business transactions allows you to:
* Have organized accounting records. Do not wait until tax time to figure out where the money belongs. This money mistake creates unnecessary stress.
* File accurate taxes. Without documentation and accurate bookkeeping, your tax preparer will be unable to position your business to obtain the correct tax deductions.
* Know the financial health of your business. One business account allows for better bookkeeping and obtaining clean financial statements, and clean financial statements allow for sound business decisions. You can view one bank statement and know the ins and outs of your money.
* Build credit with banks and creditors. As your massage business grows, you may want to expand, make improvements on your current space or obtain financing for better equipment. A separate business bank account allows your business to establish creditability without depending on your personal credit score. Banks and creditors evaluate financial statements as well as the business’ financial creditability to make their decisions.
Can I Get in Legal Trouble if I Don’t Have a Business Account?
It depends on how you structure or incorporate your business. Not all businesses are structured the same; therefore, not all are legally required to follow the same rules.
Separation of bank accounts is a must if your business is a separate legal entity. Limited liability companies (LLCs) and corporations are legally required to separate business and personal funds.
Regardless of your business structure, it is best accounting practice to keep your funds separate. If you get into the habit of doing this when your business is small, as you grow and increase profitability these best practices will become routine.
How Do I Open a Business Account?
When you set up your business, you should immediately obtain a separate business account.
A good place to start would be the same bank with which you have your personal accounts. One advantage is that they may already know you and you may have a good track record with them. However, you should also shop around to see where terms may work better in your favor.
Look for accounts that do not have a minimal balance requirement, or those that don’t charge monthly fees to manage the account.
While every bank is different, there are certain documents they may universally require:
* Business license
* Articles of incorporation
* Employer identification number
* Partnership agreement
Once your business account is established, use business funds for business expenses and personal funds for personal expenses.
Also, do not deposit business checks into your personal account. Have clients write checks payable to the business name.
Be sure to link credit or debit card business deposits into your business account, not your personal account.
How Do I Pay Myself?
If you are not on your company’s payroll, write yourself a check from your business checking account and deposit that check into your personal account. In the memo section of the check, indicate “paycheck.”
While it may be easier to just make an electronic transfer from one account to another, doing it this way creates a paper trail that can be followed if you need to provide additional information for tax purposes.
What if Business Funds Get Low?
All new businesses go through periods of growth in which the revenue may not necessarily meet the expenses. Personal savings or lines of credit may be beneficial during this period. It’s also a good time to learn the cycles of your business and anticipate times of surplus. It is during these times that you want to maximize savings in anticipation of lean times that will eventually come.
If you decide to use money from personal accounts to help during these times of scarcity, remember to create a paper trail that can be followed. Again, write a check from your personal account to the business account. In addition, clearly document which account the money is coming from and the purpose of the funds.
What if I Use the Wrong Credit Card?
There may be times when you slip up and use your personal credit card to purchase business supplies. Money mistakes happen; don’t beat yourself up about it.
Keep the receipt and document the purpose of the business expense. Then make sure you return those funds from your business to your personal account. Get into the habit of using checks and simply write one from the business to yourself.
Spare Yourself Stress
Setting up your business account from the beginning of your business will save you a lot of headaches down the road. Initially, it may seem tedious; however, it will be beneficial as your massage business grows.
Becoming an entrepreneur is not easy, but if you avoid money mistakes by getting financial processes in place and staying diligent with them, you will reap the benefits.
About the Author:
Lozelle Mathai, MBA, CFEI, is a financial accountant with over 18 years of experience in the field of financial management and accounting. She is the owner of Healthy Bodies of Finance, a division of Closing Your Books LLC. The Body of Accounting is an accounting consultancy firm that educates massage and bodywork business owners on how to manage, maintain and understand their business finances, including how to determine the best structure for their business. Her articles for this publication include “Can I Afford to Buy That? Here’s How to Finance a CE Class, New Table or Equipment.”