Keeping track of your business expenses can help you organize your business finances. It can also make doing your taxes easier each year. However, if you’re not tracking your business expenses, you may be losing out on the potential savings opportunities. Understanding where your money goes can help you keep your spending in check while ensuring you have easy records if you’re ever audited. This article will discuss the importance of keeping track of your business expenses and how to do it.
Importance of Tracking Business Expenses
Your business depends on detailed financial tracking and overall stability through bookkeeping and accounting. Financial stability also depends on other factors, such as your industry and the state of the economy.
However, one essential factor that ensures the financial health of your business is your ability to track expenses. Tracking your expenses can help you better control cash flow and ensure your money is being spent wisely.
Overall, expense tracking makes it easier to organize your finances and makes managing taxes simple while helping you avoid overspending and cut business costs.
Best Ways to Keep Track of Your Expenses
Tracking all of your expenses can be difficult. You might pay for some items, such as lunches, in cash, and others with checks and cards when you own a business. However, there are ways to track your expenses easier, including:
Open a Business Bank Account
Opening a small business bank account can help you create a boundary between your business finances and personal finances. If you’re paying for your business and personal expenses from the same bank account, it can be difficult to decipher what’s truly a business expense once you look at your bank statements.
You might not always remember all of the payments you make throughout the day, especially in your personal life. Having a business bank account allows you to separate your business from the equation to have a clear picture of total expenses just for the business.
Additionally, it’s a good idea to have a business bank account for legal purposes, especially if you own a small business or freelance. Other benefits of a business bank account include:
- Proof of purchases
- Accurate bank statements
- Business debit card
- Ability to accept payments
With a bank account with one purpose, you can easily understand your bank statement and keep track of all of the money your business uses.
Use Business Cards
Instead of using a personal card for business accounts, consider opening up a business card you’ll use only for business purposes. Opening up a credit card can help you establish a credit history, which can help your business receive financing. When your business needs a loan, lenders and banks prefer that your business has established credit to prove your ability to repay the loan. They will also look into your personal finances to ensure good financial health in your personal and business lives.
Having a credit card can also help your business make big purchases when you’re just starting and don’t have a large revenue. Instead of paying for everything immediately, you can put large purchases on a credit card and slowly pay it off. Depending on your provider, your business credit card might also come with other perks, such as travel rewards and cashback.
When using a business credit card, be careful not to use it for personal purchase; instead, use it for business expenses only, including everything from office equipment to employment background checks. Keeping all of your expenses on one card can speed up bookkeeping and reduce the time it takes you to do your taxes.
Automate Record-Keeping
If you’re using tax software, you might already automate record-keeping. By connecting your bank account with bookkeeping or accounting software, you can categorize your expenses for a clearer picture of your finances. Digitizing your records also provides you with easy access to your financial information at all times.
Keeping digitized and automated records means you won’t have to keep receipts or documents in storage.
Organize Receipts
If you use paper receipts to do your taxes or track expenses and haven’t digitized them, they should at least be organized. Small business owners must keep records of business expenses for at least three years. You can be audited at any time, and the IRS has three years to act if they find something suspicious in your taxes.
Keeping your paper receipts organized can help you deal with the chaos that might come with a financial audit. Not only that, but you might need to keep records of your expenses to show clients if you bill them for your business expenses.
When organizing your clients, add labels to them with the client name, expense category, date, and other information that can stop you from spending hours searching for the right receipt.
Categorize Expenses
Good financial management includes categorizing your expenses to help you see which areas of the business are costing you the most. You can categorize your business expenses by:
- Travel expenses
- Office supplies
- Daily expenses
- Payroll
- Technology
Consider Your Accounting Method
If you have an accountant on staff, you don’t have to worry about how your accounting and bookkeeping are being done. However, if you haven’t hired an accountant yet, you must pick a method in which you’ll report your income and expenses. You can choose between either cash or accrual accounting. Most private companies use the accrual method for financial reporting.
Accrual accounting records transact once the sale is complete and offers businesses the opportunity to deduct expenses in the same tax year they are incurred.
Cash accounting is sometimes more straightforward and might be easier to manage for small businesses. The transaction is recorded as soon as payment is received with this method. Additionally, expenses are deducted in the same tax year they’re paid.
Tracking Your Business Expenses
As a small business, you must continuously track expenses. However, depending on how frequently you spend money, you might not have to check your finances every day. If you’re using software, you can automate bookkeeping to track expenses through cards and bank accounts and upload receipts before they get lost. Tracking expenses provides you with a clear financial picture of your business to improve your spending habits.
Matt Casadona
Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. Matt is passionate about marketing and business strategy and enjoys San Diego life, traveling, and music.
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