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Managing business expenses is a struggle for small business owners. However, the basics of financial planning can make the difference between a failed business and a successful one. Actively tracking records and analyzing your business’ finances can help you plan for the future. With proper preparation, you can make sure your business pays its operational expenses, loans, payroll, and other bills in between. But before we get too ahead of ourselves, let’s get down to the basics.
Overview: What Qualifies as a Business Expense?
Incurring business expenses is all a part of operating a business. These expenditures are necessary to keep your business running. Your business expenses might include costs such as payroll, inventory, utilities, and rent. Business expenses are also referred to as deductions and boil down to any costs associated with maintaining your business operations.
Importance of Small Business Expense Tracking
The financial health of your small business relates to the management of its finances which a CPA or accountant usually completes. Tracking your business expenses is beneficial in different ways such as creating a budget, utilizing tax deductions, managing cash flow, prepping for increased expenses, examining cost savings, and comparing expenses to your competitors. Recording your expenses to compare them against your revenue can show accurate profit margins.
Creating a budget
Tracking expenses involves knowing how much cash your business has on hand and your business’s spending habits. Take a look at your expenses, organize these expenses by category, and create a budget for your business for the month and year. Adhere to this budget whenever you make purchases and refer to it before making any non-essential spending. If you’re starting a new business, don’t forget to account for start-up costs.
Utilizing tax deductions
According to the IRS, to be considered a deductible, a business expense must be ordinary and necessaryIRS.”Deducting Business Expenses” Accessed April 18, 2022.. Most of your business’s expenses may be fully or partially written off. However, to receive a deduction you’ll need the supporting documents such as receipts and statements. These deductions will aid the business’s taxable income in your favor.
Managing cash flow
Managing cash flow involves looking at your books and knowing the available funds you have. Logging expenses can help to optimize your spending habits. Plan out expenses to stay on track with payments and minimize fees or interest rates according to credit or loan payment terms. Additionally, this planning allows you to capitalize on deals and discounts with your suppliers.
Prepping for increases and examining cost savings
Keep track of price increase notices from suppliers so that you may budget accordingly. Take into account possibilities like higher demand for your products/services or yearly inflation. Preparation for unexpected increases is necessary to avoid costs that will hurt your business. You may also be able to negotiate payment terms with your suppliers and examine your overall budget for cost-saving measures.
Comparing expenses to your competitors
Analyze expense data regarding your industry, state, and region provided by the US Census. This helps determine where your business falls on expenditures compared to other small businesses. Compare your expenses with others to ensure that your outgoing costs are reasonable for your industry and location. If you’re spending a lot more than competitors you may need to shop around for different suppliers or better deals.
How to Track Business Expenses Using Accounting Software
Any small business needs to bookkeep to organize and monitor all business expenses. Tracking expenses manually involves collecting expense documents like invoices and receipts, cataloging them, and tracking incoming and outgoing cash. These numbers will be used to produce monthly reports like income statements, balance sheets, cash flow statements, accounts payable/receivable reports, and inventory reports. Once these various documents are created, you will need to review the reports to ensure everything is in order.
Tracking expenses manually takes too much time and accounting software can automate the majority of this process. There are plenty of accounting solution services with different features and capabilities designed to simplify the accounting process. Businesses will still need to take certain steps to aid this process and maintain a healthy financial status.
Step 1: Open a Business Bank Account
First, open a dedicated business bank account for expenses. This will make it much easier to track business expenses and claim tax deductions. Additionally, business accounts offer personal liability protection. By keeping your business funds separate from your personal funds, you will also create a better separation between what belongs to you and what belongs to the business. It also may come with an optional business line of credit for cases in which cash is not available to cover the business’s expenses.
Use a dedicated business credit card for tracking business expenses
A business credit card gives small businesses a way to make big purchases even if the funds are not available yet. This allows you to use the credit to invest in the future of your business or increase your available credit line if you plan on not using it. A higher amount of credit available makes your business’s finances appear in good standing. Business credit cards support favorable negotiations with suppliers and can help establish a credit history. This is vital if your business ever needs to secure additional financing as well as desirable financing terms. Finally, many credit cards offer perks or rewards for the business which may include additional savings or travel points.
Step 2: Decide on Cash or Accrual Accounting
Choose a consistent accounting method for tax purposes. Generally, in standing with IRS requirements, small businesses with three years of $25 million or less in annual gross receipts before taxes may select accrual accounting or cash basis accounting. It should be noted that accrual accounting is the recognized accounting method under the generally accepted accounting principles (GAAP). Public companies are required to use the accrual accounting financial method and most private companies prefer to use it as well.
Cash basis accounting can be easier for small businesses to manage. It is more straightforward as the transaction is recorded upon payment. Additionally, with this method business expense tax deductions occur during the tax year they are paid.
On the other hand, accrual basis accounting documents transactions in bookkeeping records once the sale is complete. Accrual accounting allows for businesses to submit deductions in the tax year in which the sale occurs regardless of when the final payment is made. While accrual accounting may be seen as more difficult due to its double-entry bookkeeping, it gives an accurate financial outlook as it takes a long-term view of the business’s finances.
Step 3: Choose an Accounting System to Track Business Expenses
Accounting software solutions make it easy to monitor, organize, pay, and analyze business expenses. These software systems can track invoices from suppliers, rent payments, and even payroll. They also reduce the work associated with tracking expenses while simultaneously increasing the accuracy of your books. Accounting software solutions are developed with the purpose that a CPA, freelance accountant, or small business can use them easily.
When choosing the best accounting system for your business, it’s best to keep the following points in mind:
- Pricing: Accounting software will range in price and you want to choose one that fits within your budget and business needs. The most expensive system isn’t essential to manage your expenses.
- Data storage and security: This system will collect customer and employee data, therefore a system that doesn’t sacrifice security is crucial.
- Functionality: Analyze all of your accounting needs to choose an accounting software with your desired features. If you’re a small business owner, it’s best to not choose software with the most features as it may feel complicated and overwhelming.
Step 4: Connect the Business Expense Tracker with Your Business Accounts
Depending on your chosen accounting software there will be different methods of integration concerning your business accounts. Some basic software systems require the business to download credit card and bank statements and then import them manually into the system. However, most services provide a connectivity plug-in that will digitally link the bank accounts with the accounting software. This method imports bank transactions and statements daily, creating an automatic bookkeeping system.
Other software systems even allow business owners to manage their banking entirely in the accounting system with no need to separately log into their bank account portals. Remember that these features can help dwindle the amount of time you have to spend maintaining your business’s financial records.
Step 5: Record All Expenses Promptly
Your chosen accounting software may include or support mobile apps with receipt scanning capabilities. Either way, you want to incorporate some method of digitalizing your receipts seamlessly and as soon as possible. That way, when it comes time to do your taxes you won’t have to scatter a pile of unorganized receipts across your desk.
Manage and organize receipts properly
Break your receipts down into categories and organize them by expense and date of purchase. When you go back through your expenses for your yearly taxes you’ll have all of the necessary information already compiled neatly. This will help in the case of needing to check a previous transaction you’ll know exactly where to look.
This information can help create reports that tell you where your business financially stands and prepare you to make informed decisions regarding your expenses. Be sure to have additional notes for clarity such as what the transaction was for and how it applied to your business’s operational needs. You can analyze how much you’re spending and if the business is profitable which can lead you to make educated decisions about how to improve finances and reduce costs.
Digitize and record receipts
If too much time passes after a transaction is made, it will be difficult for you to record it into your system. Ink fades over time and receipts can quickly become hard to read and therefore hard to record and provide as evidence for a deduction.
For these reasons, digitally filing your receipts can be a financial lifesaver. Simply incorporate a receipt scanner that allows you to capture pictures of your receipts and store them digitally on your accounting software. You’ll have all the proof you need for tax deductions and all of your records will be securely online in case there is an audit.
Step 6: Consider Connecting a Business Expense Tracking App
Business expense tracking apps can be effective ways to keep spending under control. These apps work as databases that automate storing receipts, collecting transactional data, and monitoring your overall finances. Tracking apps show your spending habits, financial patterns, and visual charts of your expenses. This will give you a clear comparison between your business’s income and its expenses.
Keeping Track of Business Expenses: Final Thoughts
According to a U.S. Bank study, cash flow management problems caused the failure of 82% of businessesSmall Biz Ahead.”The Key to Managing Profit and Cash Flow for Your Small Business and Knowing the Difference Between the Two.” Accessed April 18. 2022.. Staying on top of your finances can determine the success of your business. Tracking your business expenses can be difficult and time-consuming, but with the right tools, you can fast-track the process and lay the groundwork for financial success. Detailed financial books keep all business funding, expenses, and income in one place. Routine bookkeeping, along with a dedicated merchant service provider, is key to ensuring you have an accurate outlook on your business’s financial health and will prepare you for the essential business expense deductions come tax season.
- IRS.”Deducting Business Expenses” Accessed April 18, 2022.
- Small Biz Ahead.”The Key to Managing Profit and Cash Flow for Your Small Business and Knowing the Difference Between the Two.” Accessed April 18. 2022.