This is part two of a three-part series on coaching business owner clients. You can read part one here.

As a financial coach, I’ve found that one of the most crucial steps in helping small business owners achieve financial clarity and success is separating their business and personal finances.

I know this process can be overwhelming for many entrepreneurs, but with the right guidance and tools, it can lead to a more organized and stress-free financial life.

The Importance of Financial Worksheets

Before diving into the process of separating finances, I always ensure my clients have the right tools in place. I have some financial worksheets I use with my clients at Fiscal Fitness. These worksheets provide a clear, visual representation of a client’s financial situation and serve as a foundation for our coaching process.

To make the process as easy to follow as possible, get yours here!

Starting with the Personal Financial Worksheet

The first step in my process of separating business and personal finances is to review the client’s personal financial worksheet. As I go through each expense, I determine whether it should be paid out of the business or personal checking account. All expenses need to be accounted for somewhere, even if the client is unsure of the correct categorization.

One key factor I consider when deciding whether an expense belongs on the business or personal worksheet is its deductibility as a business expense. While some expenses are straightforward, others may fall into a gray area. Keep in mind that just because an expense is moved to the business worksheet, it doesn’t necessarily mean it’s 100% deductible.

Cash Flow vs. Tax Deductibility

There’s a big distinction between the cash flow of a business and the tax deductibility of expenses. As a financial coach, my primary focus is on managing the overall cash flow for the business and the client, while the client’s accountant will handle the specifics of tax deductions.

Take business meals with clients, for example. While these expenses are typically 50% deductible, the business will likely pay 100% of the cost upfront. Rather than laying down two credit cards, one personal and one business, to pay for the meal, it makes more sense to pay for the entire expense from the business card and have the accountant write off the appropriate portion when filing taxes.

There will always be expenses that fall into a gray area when it comes to categorization. In these cases, it makes sense to move the expense to the business worksheet initially and then have the client consult with their accountant for final guidance.

And that relationship with a tax professional is incredibly important, as they can provide valuable insights and ensure the business is in compliance with tax laws. As a financial coach, part of my role is to help clients feel prepared and confident when meeting with their accountant.

Line-by-Line Review of the Personal Financial Worksheet

Let’s look at some common expenses and how I typically categorize them.

  1. Cell phone expenses are often paid out of the business account, even though only a portion may be tax-deductible.
  2. Vehicle expenses for the business owner are typically paid from the business account, while expenses for a spouse or children’s vehicles remain personal (unless the spouse is a business partner).
  3. Health insurance premiums for self-employed individuals can be tricky, as deductibility depends on various factors. I recommend paying these premiums out of the business account and letting the accountant determine the deductible portion.
  4. Retirement contributions, such as those to a Roth IRA, generally remain on the personal worksheet, as most of my clients aren’t taking a paycheck or participating in a company-sponsored retirement plan when they first start working with me.
  5. Credit card debt can be a major source of financial commingling. I advise keeping business and personal expenses on separate credit cards to simplify tracking and deductions.

Determining the Business Owner’s Paycheck

After reviewing the personal financial worksheet, the next step is to determine how much the business owner needs to pay themselves to cover their personal expenses. This is the primary goal at this stage, rather than analyzing or trimming expenses.

To calculate this number, take the client’s total personal expenses and subtract any income from sources other than the business (e.g., a spouse’s paycheck). The remaining amount is what needs to be covered by the business paycheck. I recommend rounding up this figure slightly to account for any forgotten or miscellaneous expenses.

Analyzing the Business Financial Worksheet

With the business owner’s paycheck amount in hand, it’s time to move on to the business financial worksheet. Start by adding the paycheck amount to the “Your Salary” line under “Payroll Expenses.”

Then review the various expense categories on the business worksheet, such as rent, office expenses, vehicle expenses, and insurance premiums. These expenses may vary depending on the type of business you’re coaching (e.g., online vs. local businesses).

Estimating Taxes and Setting Aside Funds

One of the most significant sources of stress and confusion for small business owners is often taxes. I always discuss the importance of estimating tax obligations and setting aside funds each month to cover these costs.

While my goal is not to calculate the exact tax liability (which is the accountant’s job), I recommend using a tax withholding calculator or tax tables to arrive at a rough estimate. It’s important to be honest with the client about the potential for this number to change and the need to consult with their accountant for a final determination.

In the meantime, clients should set up a separate savings account for taxes and start setting aside the estimated amount each month. This proactive approach can help alleviate the stress and financial burden of taxes down the line.

My Role as a Financial Coach

It’s so important to meet clients where they are and provide clear, actionable advice. As a financial coach, it’s your role to break down complex financial concepts and guide your clients toward a more organized and sustainable financial future.

This process is not about perfection but rather about making progress. By taking small steps and refining the financial plan over time, I believe business owners can achieve greater financial clarity and confidence.

Separating business and personal finances is a crucial step in helping small business owners achieve financial success. By guiding clients through this process of categorizing expenses, determining their paycheck amount, and estimating taxes, you can help alleviate the stress and confusion that often comes with managing business finances.