How to Track Your Small Business Expenses Effectively?

Introduction

Maintaining track of all business expenses can be challenging to do when you're too busy managing the daily operations of your company. However, tracking your business is crucial since it allows you to see its exact performance. You can do a financial analysis to determine what investments to make and when to take a step back.

When it comes to managing expenses, startups frequently focus solely on their quarterly or monthly outgoings. This may result in overspending, inaccurate cash calculations, and failure to keep audit-ready financial records. 

In order to handle expenses well, one should:

• Set clear expense policies
• Record every business expense
• Document receipts
• Reconcile bank statements and cash books
• Generate periodical expense reports.

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A fundamental aspect of financial management is tracking, recording, and analysing spending. Done correctly, this process can significantly raise the likelihood that a company will not experience financial troubles. A company that tracks its expenses can improve its planning, foresee cash flow dips, and ensure that key costs, like payroll, are constantly met.

In order to keep your business operating, you, as the owner, need to track and control various expenses. Sorting through these expenses by category will make it easier for you to file taxes, keep an orderly record of all transactions, and manage your finances. Determining what is and isn't tax deductible can also be made simpler by familiarising yourself with the primary categories of business expenses.

Fortunately, there are numerous approaches to setting up a successful expense-tracking system, and we will cover them all in this blog post. Continue reading to find out more about how to begin tracking your expenses. In this post, we'll cover the significance of expense management, different categories of expenses, and some practical strategies for keeping track of your spending.

Now, let’s get going.

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What are business expenses?

The costs incurred in operating a business, whether it is a major corporation or a small individual operation, are referred to as business expenses. This covers overhead expenses, including electricity and rent, equipment purchases, travel expenditures, advertising costs, payroll, and so forth.

Ordinary and necessary business expenses are deducted from your revenue in order to determine your profits, losses, and taxable income. These expenses are also referred to as business deductions. Monitoring your company's spending allows you to track gains and losses and analyse industry trends, which can be helpful in forecasting. You can prepare for the prudent use of funds since you are aware of how much you have and where it is going.

If you present the IRS with supporting documentation, they will write off your business expenses. As a result, keeping track of your business expenses helps lower the taxable business income of your company.

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Tips to help companies manage their spending better

Here are some tips to help you track business expenses more easily:

Gauge your financial literacy

To decide what kind of software or accounting systems would be appropriate for you, consider your current level of financial literacy.  Investing in software with more categorisation tools might be a wise decision if the company has many expenses and a range of business accounts.

Consider hiring a bookkeeper

To improve the accuracy of your business expenditure tracking, consider hiring a bookkeeper. Organisations might benefit from the oversight of a bookkeeper who also provides financial guidance. You can conduct online research on various bookkeeping services for the purpose of finding a bookkeeper who can work with your budget. 

Use software tools to keep track of your spending

As your firm expands, you should start using expenditure management software to process expenses, create expense reports, and record spending data. The majority of accounting software, such as QuickBooks, Xero, or Inkle Books, allows for interfaces with cost management software. These integrations make your finance team's expenditure management system more efficient by automatically importing, syncing, and classifying expense data.

Prevent overspending with granular spending tracking

You can find areas where your startup is overspending by keeping a very detailed record of your expenses. Additionally, it makes sense to keep track of the precise goods that your staff members buy rather than merely classifying them as "software licences," for example. Negotiating an enterprise discount or cancelling duplicate subscriptions could help you save money if several employees purchase the same product. 

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What kind of expenses should you expect?

Many variables impact the financial health of your organisation. However, among the most significant are your expenses. You need to know how much money your company is spending. As a small business owner, you ought to be prepared for the following significant expenses. 

Office Supplies

The supplies required to carry out administrative tasks are included in office supplies. Pens & pencils, paper, software, cleaning and maintenance, and ink cartridges are examples of office supplies.  Most office supplies are deducted from the expense account when the business uses them. 

Employee Costs

Employee costs apart from base wages could include fringe benefits, perquisites, allowances, bonuses, in a few cases, employee leisure and recreational arrangements, and, of course, compliance costs like provident funds, insurance and other compliance costs, and payroll taxes. 

Nonetheless, hiring fees, overhead, and workers' compensation insurance may also be included in your business expenses. The rules and regulations in your locality regarding employees should be known to you. Furthermore, prior to hiring an employee, it's crucial to be able to estimate their total cost.

Business Travel

Any expenditures related to departing from your primary place of work will be included in your travel expenses. Therefore, in order to write off the costs of your business travel from your taxes, you must travel outside of your tax residence.

Expenses associated with business travel may include housing, meals, luggage fees, laundry services, transportation, and other necessary expenditures. 

Operating Expenses

Filing tax returns and identifying deductible items can be facilitated by categorising business expenses. The primary deductible costs that small businesses must be cognizant of are listed below. 

Taxes

State and local sales taxes, local income taxes, personal property taxes, and excise taxes are examples of business-related tax expenses that may be written off. 

Utilities and Rent

You can deduct the costs of utilities you pay that are required to keep your business running. You may be required to pay rent for your office, extra storage space, and electricity, phone, and internet costs.

The cost of a computer, mobile data plan, office chair, work desk, and other such expenses can be deducted from your taxable income if you work from home and maintain a home office setup.

Insurance

If the insurance is specifically for your business or trade, you can deduct the regular and necessary cost of the policy as a business expense. Insurance premiums, commercial property insurance, professional and general liability insurance, and data breach insurance are a few examples of expenses that can be written off against taxes. 

Commutation Expenses

The cost of ownership and operation of a car or similar vehicle used for business activities may be tax deductible. More specifically, the following expenses can be deducted: petrol, mileage for business usage, parking costs, tolls, and depreciation (although the latter is subject to certain limitations).  

Compensation

Paying direct labour wages to contractors or employees can be deducted as a business expense. Business owners may deduct certain expenditures from their total revenue to calculate their taxable income. These expenses are known as tax-deductible business expenses or "tax write-offs." The amount of taxes you have to pay can be decreased by deducting certain business expenses. 

Key instances of tax-deductible expenses are as follows:

• Use of a vehicle or residence for business purposes
• Taxes on direct labour
• Rent for an office or storage space 
• payments for insurance
• utilities, such as internet access and phone costs.

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It's crucial to remember that this is not a comprehensive list and that certain companies may incur additional costs specific to their industry or mode of operation.

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How to track expenses?

The following actions can be taken to ensure proper tracking of business expenses:

Get a Bank Account Exclusive To Your Business

As a new business owner, you must open a business bank account. That account should only be used for business-related transactions once it is operational.

While there may be times when you need to utilise your personal bank account for work purposes. Having a separate business account will make tracking and recording your expenses much easier.

Choose An Accounting System

Selecting a suitable accounting system will enable you to track your spending better once you have a separate business bank account. Accounting systems can be broadly classified into two types: accrual and cash. Cash accounting only recognises transactions when there is a cash exchange; in contrast, an accrual accounting system records revenue or expenses when they happen. You should compare these two approaches to choose the one that would work best for your company. 

Categorise Each Expense Using Software

Using business or accounting software to set up a system for recording your spending is generally advantageous, regardless of the accounting system you end up selecting. Business software can streamline the recording process and assist you in making sure your financial data is correct and updated. Do some web research to find out what kinds of software are out there. 

While some software may have more features for small enterprises, others might be more beneficial for larger organisations. Select software that allows you to compare costs and organise them into categories. 

Record And Monitor Your Expenses

When it's time to perform an audit, carefully review all the business expenses you have recorded to ensure everything is reported. Consider making an investment in software programs or systems that let you manually enter your expenses if you opt against using an automated approach to record them. 

Consider Utilising An Expense Application

While not necessary for everyone,  if you frequently travel for work, it can be worthwhile to look into some of the expense applications out there. These applications are made to keep track of all of your travel-related business expenses, including mileage, airfare, meal and entertainment costs, and other expenses.

Use a Dedicated Credit Card For Your Business

The company can build a credit history with a dedicated business credit card, enabling it to get funding when needed and at the best terms. When a company needs financing, it can build a credit history with a specific business credit card and qualify for the best conditions available. In the early stages of the business, having credit also allows it to make large purchases. Interestingly, having credit available is a sign of good financial standing.

Credit cards can shield companies from identity theft and assist in negotiating advantageous contracts with suppliers. Business benefits like travel or business rewards are also available with credit cards.

Link Your Bank Accounts To Your Accounting Programmes

Depending on the software it selects, a small business can enable varying degrees of integration with its bank. Companies can manually enter bank and credit card statements into the system as CSV (Excel) files by downloading the statements. Companies have the option to download bank and credit card statements and manually enter them into the system as CSV (Excel) files. 

The majority of accounting systems provide a connectivity plug-in that allows you to access a bank feed. Every day, statements and bank transactions are imported into accounting software via a digital connection between the bank account and the program. Specific accounting software has a direct bank integration, allowing the owner of the company to handle and finish all banking within the accounting system without having to visit the bank account portal.

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Perks of tracking expenses

You can benefit from tracking your business expenses in the following ways:

Helps In Tax Benefits

Keeping track of your expenses will help you find out which costs are tax deductible, offer tax benefits, and better prepare you for tax season. According to the IRS, a business expense cannot be deducted unless it is both ordinary and necessary. An ordinary expense is common and accepted in a particular industry or business. 

Systematic Maintenance Of Records

An expense that is beneficial and appropriate for the trade or business is considered a necessary expense. If a company expense is supported by documentation evidence (receipts and statements), it can be written off in whole or in part. As a result, the taxable business income of an entity is decreased.

Keeping an accurate transaction record is beneficial for business audits and inspections. Maintaining a regular tab of your business expenses will assist you in assessing your financial situation, identifying areas for improvement, and assessing the profitability of your enterprise. 

Benefit Of Categorisation 

Expense monitoring makes it easier to classify and arrange all the financial information needed to keep the company operating. Monitoring your company's spending also aids in efficient budgeting and finding external funding, if necessary. 

Aids In Overall Compliance

As a business owner, you will require your year-end reports and your cost information for tax purposes. They are also essential for annual financial planning. You may optimise your tax deductions, cash flow, and future planning by efficiently tracking your expenses.

Real-Time Visibility Over Your Financials

Obtain real-time financial visibility since knowing your company's cash flow requires precise expenditure tracking. Manage business expenditures in real-time.  Monitoring your company's spending can also make it easier for you to allocate and earmark funds. 

Company funds should be used wisely. With accurate expense tracking, you can instantly spot any budgeting errors or unusual spending that could have repercussions if ignored. It also helps you manage cash flow and optimise budgets.

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Conclusion

Keeping an eye on your business expenses can allow you to assess your financial standing. Thus, consider the tips suggested above to ensure an expense is not overlooked. Making more intelligent financial decisions and obtaining tax deductions and other business financial aid are made possible by keeping an organised record of your expenses. 

After learning how to keep track of your spending, you must discover ways to bring in money so that you can pay your financial obligations. Petty expenses can be decreased, the financial risk associated with traditional business credit cards can be minimised, and employee expenditure tracking can be completed quickly and effortlessly with the use of expense accounting software.

Maintaining a record of business spending is essential for improving daily, weekly, and monthly financial management. It further backs you in making long-term choices on employee cost policy and budgets.

Understanding how to handle business spending has always seemed intimidating or like something you'd do "when everything slowed down’’? You don't have to wait anymore! 

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