When managing a business, you want to keep an account of all the money moving through it. Expense tracking may not be the most exciting part of running a business, but it is essential to ensure your company stays financially healthy.
This post will teach you how to manage your expenses to ensure your small business stays profitable and your cash flow healthy. You will learn all about business expenses, including the benefits of tracking, common categories, and tips to keep your expenses organized.
How to Track Your Small Business Expenses Using These Tips
Tracking business expenses enables you to reduce costs in areas you could be overspending while keeping a positive cash flow. It also saves you time and headache when filing returns and claiming deductions during tax season. Small business owners should take these six steps to track their expenses:
1. Open a business account at the bank
Separating your business funds from your personal money is crucial. To do this, open checking, savings, credit card, and merchant services accounts. The bank will request an Employer Identification Number (EIN). If you are a sole proprietor, you can use your social security number.
2. Perform all business transactions with the company credit card
A dedicated business credit card will establish a financial history that will assist in receiving financing in the future if necessary. Credit is helpful for big purchases when starting out. A company credit card will also offer perks like travel or business rewards.
3. Decide on cash or accrual accounting rules
As a small business, you need to pick and stick to a set of accounting rules, either cash or accrual accounting. Cash basis accounting is the more straightforward approach of the two, but most companies require accrual accounting as it’s the most recognized method.
4. Automate record keeping and expense tracking with accounting software
The best way to track your expenses is by putting everything in one spot. Cloud-based solutions make it easy to monitor, organize, and make payments. With good accounting software, you can categorize your spending and perform yearly comparisons. Try using Microsoft Excel when starting out. As your expenses start getting more complicated, you can shift to accounting software that offers more functionality, such as QuickBooks or Xero.
5. Sync your bank account and accounting software to import transactions
Depending on your accounting software, you can connect your bank account to import transactions and statements. You as a business can define the matching rules to make the reconciliation process more efficient. Doing this will ensure higher accuracy in your expense tracking.
6. Review expenses regularly
Business owners should make reviewing and categorizing their expenses a regular habit. This practice will help them better understand the flow of money, which will drive the company’s growth and survival. In addition, it will help with long-term decision-making that will benefit both customers and employees.
The Benefits of Tracking Business Expenses
Tracking and organizing your expenses as they occur is one of the best things you can do to make your business financially easy to manage. Let’s have a look at the benefits of tracking business expenses.
Cash Flow Management
Proper expense tracking enables you to manage cash flow more effectively. It gives you insight into how much money is going out of your business and thus allows you to forecast any cash flow problems. You can compare your expenses to your available funds to assess if you have enough money to cover your costs.
Identifies Areas to Reduce Costs
Expense tracking allows you to identify where you are spending money and how much you are using. You can then use this information to see whether you are within your monthly or quarterly budget. You’ll, in turn, be in a better position to spot and cut down any unnecessary costs that may be eating into your profits.
Taking Advantage of Tax Deductions
For an expense to be tax-deductible, it should be necessary and ordinary. A necessary expense, according to the IRS definition, is helpful and appropriate for your trade or business. An ordinary one is that which is acceptable in your industry.
The IRS can allow a partial or full deduction of an expense if necessary and ordinary, and if you provide evidence to show its existence. This is why you need to store your expense statements and receipts. If you don’t track your expenses, you can’t claim tax deductions since you won’t know the exact payment figures, let alone have receipts to prove them.
Prepares You for Tax Season
Tax season is often stressful for many business owners and freelancers, especially those unprepared. You need to ensure you have all your earnings and expense records in check come tax time. This way, you won’t have to run around to find every receipt and invoice incurred during the year. You also won’t have to hire a bookkeeper to help you track your year-long expenses. Tracking your business expenses on time will enable you to file tax returns and claim deductibles without much hassle.
Enables Profit Margin Calculation
You probably know that profit equals revenues minus expenses. Profit margin is total costs minus total expenses, divided by total revenue. These two formulas show that you need to know your expense figures to calculate your net income and profit margin. You can’t determine your expense figures if you don’t track them properly.
Creating Budgets
To create a monthly or quarterly budget, you need to know where your money goes and how much you spend. This means that you have an idea of your costs and expenses. Without this information, your budget has no foundation. It will be more like guesswork. You may create a budget so tight that it doesn’t cover all your costs, or too high that it goes over your spending habits.
Expense tracking comes in handy during budgeting. If you track your expenses regularly, budgeting will not be a problem for you as you’ll know the exact figures of how much money you need.
Common Categories of Business Expenses
Business expenses are essentially the costs incurred when operating an entity, and they fall into many categories. This section will provide a quick overview of business expense categories.
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Payroll
Payroll includes all the wages, commissions, and bonuses paid to employees in a business, even though they may be calculated differently. The workers might be full-time, part-time, or even contractors.
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Rent and other utilities
Rent is an expense incurred for leasing business space, whether an office or a warehouse. Utilities are services and bills such as electricity, water, trash collection, cell phone, and air conditioning.
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Maintenance and repair
Maintenance and repair are expenses incurred to keep machines and equipment in their original state and functionality.
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Employee benefit programs
This expense encompasses employee programs such as worker compensation insurance, health insurance, and retirement plans.
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Travel
These are expenses incurred for business-related travel. They include hotel accommodation, meals, flights, etc.
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Marketing and advertising
Marketing and advertising are expenses incurred for promoting your brand or products and services. Examples include paid social ads, newspaper advertising, brochures, and posters.
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Professional services
These expenses include fees paid for professional services such as legal, auditing, and accounting services.
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Insurance
This category covers insurance premiums taken by a business, for example, vehicle, property, fire, theft, liability insurance, etc.
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Taxes
Taxes are expenses incurred for the amount of money a business owes the government on business profits.
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Licenses and permits
This category encompasses the cost of acquiring a license or permit and renewing it. Examples include building permits and sales tax permits.
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Software and website expenses
This includes software subscriptions, software development, web hosting, website maintenance, domain registration, etc.
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Depreciation
Depreciation is an expense that covers the decline in value of a fixed asset over time due to obsolesce or wear and tear.
Should You Do Your Own Accounting or Use a Professional?
When deciding on whether to do your own accounting or hire a professional, base your decision on the level of expertise and the time you have to do it. Preparing financial statements and doing your taxes requires time and patience. It also requires you to be skilled in accounting.
If you are not trained in accounting or don’t have the time, it’s better to work with a professional. Besides, certified accountants know the tax laws. They can help you get the most out of your tax deductions. Send the information to your accountant every week.
You can also track and organize your expenses using the same software your accountant uses. Your accountant can set up your system for you and let you know which accounts you should use for expenses. This way you can track your expenses, and send a file to your accountant, then they can optimize your tax deductions and file your taxes for you, This approach allows you to keep an eye on your expenses while getting the expertise of an accountant at a lower cost.
Tips for Organizing Your Expenses
The key to managing expenses easily and more efficiently is to invest in the right tools and systems. Check out these simple tips for tracking and organizing your expenses.
Separate Your Business Bank Account From Your Personal One
This tip may seem obvious, but it is still worth mentioning. You want to separate your personal and your business bank account. Doing so will enable you to track your business expenses effortlessly. You won’t have to worry whether a transaction was personal or business-related since they all pertain to your entity.
Use a receipt scanner to digitize payments
A valuable investment is a small receipt scanner, as it helps with expense and document management. Most easily connect with accounting systems and map contents on the receipts to defined fields, saving time and effort. Alternatively, you can use your smartphone camera as a scanner.
Organize Your Expenses Daily
Make a habit of recording your expense transactions daily, or better yet, right at the point of contact. Doing so will allow you to remember as much detail about the transaction. You’ll also be less likely to make errors, and you won’t have to spend time trying to remember the purpose, of an expense.
Frequently Asked Questions (FAQs)
Have any questions about business expenses? Our FAQ section will cover them.
What are business expenses?
Business expenses are the costs incurred when operating a business. They get subtracted from your revenue to determine the net profit or income.
Why should I track expenses?
Tracking your business expenses as they occur enables you to manage your cash flow better. It also prepares you for tax season and allows you to claim tax deductions. Expense tracking comes in handy when creating budgets and calculating profits and profit margins.
What types of business expenses are tax-deductible?
The IRS considers an expense tax-deductible if it’s necessary, ordinary, and allows the business to generate income. Examples include travel, advertising and marketing, maintenance and repair, production costs, and payroll.
What types of expenses are not tax-deductible?
A non-tax deductible expense is, in most cases, one that isn’t necessary for business operations and doesn’t help the business generate income. Examples include fines and penalties, customer gifts, etc.
Conclusion
Whether you are just starting your small business or have an already well-established entity, you must track your business expenses. Proper expense tracking puts you in a better position to manage cash flow and determine your profit margin. It also makes your work easier during tax season since you won’t have to run around searching for transaction receipts.
There are many categories of business expenses. The most common include payroll, maintenance, repair, travel, insurance, rent, and utilities. To better organize your business expenses, use accounting software and store all your receipts manually or digitally. You can also connect your accounting software to the bank to automatically import expense transactions as they occur. Lastly, separate your personal bank account from your business one.
Resources
In this section, you’ll find a few resources that can help you manage your expenses. Many of the resources lead to search engine results giving you the latest and most popular tools and information, anytime you use the links.
Expense Trackers for Small Business Owners
There are hundreds of apps and programs that can help you track your small business expenses. Why not take some time to go over some reviews to find a tracker that works well for you? Reviews are a great way to save time and give you an overview of the features of each program. The link below leads to the latest and most popular reviews for you to explore.
Have a look at the latest search results for the top expense trackers for small businesses.
Books
Books are another option you can use to find the best way to track and manage your expenses. One point to note about non-fiction books is you don’t have to read the book from cover to cover but you can go through the index to get directly to the chapter that contains the information you’re looking for. Below you’ll find two links one is for a Google Book search result and the other leads to books related to managing your expenses from Amazon.
View the most recent Google search results for books related to managing business expenses.
View the most recent books on Amazon related to business expenses.
Courses
Taking a course is one way to become knowledgeable when it comes to managing your expenses. When taking courses online many of them allow you to learn at your own pace. On the other hand, if your looking for an in-person instructor then consider a local course. See the search results from the link below to find a course that appeals to you. I do recommend that you should look at reviews for any course before enrolling.
Google’s search results related to expense management courses for business.
News
Using a site like Google news allows you to view the most recent as well as archived stories related to business expenses. The way I see it if the media covers it, the story has some merit and is worth a few minutes of my time.
See Google’s news search results related to business expenses.
YouTube
YouTube is another excellent source for learning especially for visual learners. When watching a YouTube video keep an eye out for the related topics that appear, I always find value in these.
See the most recent videos related to managing business expenses.