Do you want to track your expenses but lack the know-how and tools? If YES, here are 17 helpful tips on how to keep track of your business expenses at no cost.
Irrespective of the type of business you run or operate, it is inevitable that you will incur one form of expense or the other. The amount of money that a business spends and how it is spends will always play a major role in determining whether a business will be successful or not.
For a business that spends a lot of money on expenses to stay afloat, it must be able to generate profit. Businesses that incur high expenses in the course of doing business but do not make a lot of profit will definitely fold up with time.
Due to the fact that all businesses must try to maintain a balance between the profits they get and the expenses they spend, it is of utmost importance to continually evaluate expenses. Evaluating these expenses allows business owners to determine where they are spending the most money and determine ways to minimize expenditure.
By reducing the amount a business spends it can be able to increase its profit. But before business expenses can be evaluated, business owners must properly track business expenses. There are various methods that can be used to keep track of business expenses. Some of the most popular methods of tracking business expenses include the use of paper filing, spreadsheets, and software systems.
The method you will go for can be based on personal preference or the type and size of business that is involved. Each of these methods focuses on organizing business expenses by specific categories and regularly updating the amounts spent in each one to discover the total business expenses of a company. Here are some other reasons why you should track your business expenses on a regular basis
4 Reasons You Must Track your Business Expenses Starting Today
a. Improved Financially Awareness and Money Management skills: one of the most common reasons that is responsible for the failure of most businesses is lack of cash. Because cash flow is so important to the survival of a business, it only makes sense that a smart business man or woman will try his best to ensure that his business does not fall into the trap of having too little?
One way you can do this is through daily expenses management so that you don’t get to the end of the month and find that expenses outstripped income.
By keeping track of your business expenses, you will be better able to control costs, know exactly what you are spending on and how much it costs you. These daily figures become your marker to see whether you’re over or under your monthly budget. The entire process helps you become more financially aware. With these data, you can detect and fix bad spending habits right from the onset before they get out of hand.
You will not only save money – which has a positive impact on your bottom line – but free up cash that you can invest in other crucial business areas, such as your marketing department.
b. You’re Better Prepared for the Tax Season and May Get Money Back: tax season can be quite a hassle especially if you are not well prepared; in fact, it can be dreaded. Business owners often scramble frantically trying to gather all the necessary invoice and receipts on their laptops and shoe boxes.
But you do not have to go through this. By keeping proper records, you will always be ready for the coming tax season. No running around, no stress and no worrying about whether you’re losing money. You see, many expenses are tax deductible which means you could get money back. These expenses include:
- Business lunches and meetings
- Cell-phone and data costs
- Travel expenses, like fuel to attend a client meeting
- Office supplies such as stationery.
- Rent expenses
- Home-office expenses: if you have home offices you may qualify for home-office write-offs. For example, if your home office is 20% of the size you can claim back 20% from utilities, maintenance, and so on.
But you can only get money back if you track, categorize and disclose these business expenses. Failure to keep accurate records means that you leave hard earned cash on the table and in the hands of the tax man.
c. Happier employees: if you are managing a team of employees, they likely send you receipts for travel expenses, meals, and other out-of-pocket expenses. By keeping track of these expenses, you can reimburse your employees their money on time. Reimbursing your employees their money keeps them happy and prevents them from having to remind you of the expense the filed some time ago.
d. Ease in determining profitability: almost every business owner knows how to calculate profitability (revenue minus expenses). Profitability tells you whether your business is doing well or not, it also helps to attract investors, funds your day-to-day activities, and aids in getting financing.
The importance of being profitable cannot be over emphasized, yet, paradoxically, a lot of business owners have very poor grasp of it. This is usually because they have failed to accurately keep record of their income and expenses making it difficult for them to really know where they stand.
Fortunately, by tracking expenses often, you can quickly determine your profitability without digging through records.
Regular tracking of business expenses will also prevent you from making educated guesses about profitability. A lot of businesses make this mistake- when the see the sales coming in, the wrongly assume that their business is more profitable than it actually is.
With that in mind, here are some ways by which a business can keep track of its expenses;
4 Affordable But Highly Effective Ways to Track Business Expenses
i. Ledger: some business owners still prefer the out dated pen and paper for keeping track of their expenses. However, ledgers can only be managed for running a small business, such as a sole proprietorship, without employees or a lot of complex transactions and as such keeping track of your expenses can be as simple as recording them in a ledge daily or once a week.
Come tax time, add up each category of expense and record them on Schedule C of your tax return. For a larger company, you will have to go for something more efficient in other to properly handle your expenses.
ii. Software and spreadsheets: computer software makes it a lot easier to keep track of business expenses. For instance, software such as QuickBooks allows you to categorize expenses, record each expense and label it with the proper category.
You can also run reports to track spending in different categories. Software are more efficient than the manual pen and paper method and it makes preparing taxes easier, because the computer keeps track of expenses and adds them up for you. You should back up your software daily to avoid losing your business records.
Business owners can also track business expenses through the use of spreadsheets. Spreadsheets and software use computerized logs to track expenses in a similar fashion to paper logs. A lot of companies prefer to go for this method when tracking expenses because it requires less physical storage space and records can be accessed from nearly anywhere at any time.
It can also be much easier to organize business expense categories and update totals when using this method. The most common business expense categories included in software tracking systems include rent, utilities, travel costs, client entertainment, payroll, taxes, and supplies. Small business expense tracking software calculates costs automatically when expenses are entered, which saves a lot of time in comparison to other methods.
iii. Receipts: Your record of expenses, whether written or entered into the computer, is only part of the documentation you need for your business taxes. You should also keep the receipts for your expenses. For a smaller business with few receipts, an accordion-type file with labels for the different categories of expenses, such as Advertising, Office Supplies, Postage, et al. will work fine. For a larger business, folders in a file cabinet can work. After you’ve recorded an expense, file the receipt in the appropriate file folder or section of your accordion file.
iv. Mileage: If you use your personal vehicle for your business, you can deduct a fixed rate for every mile you drive for business purposes, such as calling on clients or driving to the office supply store to pick up printer cartridges. To do this, you should keep a mileage log in your car and record the starting and ending miles for each trip, along with the purpose of the trip. This makes it easier to add up your business miles at the end of the year, but it also serves as documentation to justify your mileage deduction to the IRS.
How to Keep Track of Business Expenses – 17 Helpful Tips
1. Create a business bank account: a lot of sole proprietors do not see the need for separating their business and personal accounts. If you have a similar mindset, then it is time you discard it and get a business bank account. Always make sure that your business income goes to your business account and use a business credit or checking account for any business-related purchases that can be paid by card.
If they need arises, you can move funds between the two accounts but a clear distinction between the two accounts will help you to easily keep track of your business and personal expenses. Creating a business bank account will also build up your business credit, which will come in handy if you need financing in the future.
In addition, it makes sense to get a credit card dedicated to business use. This is because you will find it easier to systematically organize your expenses with the aid of a dedicated credit card. This should also be more convenient than carrying cash as most retailers now accept credit cards for small transactions as well.
2. Do not do away with your receipts: don’t just throw away receipts, rather when you get receipts for business-related purchases, store them in envelopes or a drawer and then file them in a file cabinet, organized by month. If you are audited, you may need these receipts as evidence of your business purchases.
Keeping copies of expense receipts is very useful when you are filling your tax returns. Granted, the IRS does not require receipts for business expenses that do not exceed 75 dollar, but it is recommended (especially for a small business) to retain receipts of purchase in order to track business expenses effectively.
3. Use an online calendar to note your expenses as they occur: online calendar tool such as Google Calendar can be a very valuable tool for setting up notifications for recurring or one-time expenses. Use the event form to write down the type of expense (i.e., utilities, rent, contractor services), and the recipient of the funds. These calendars can also be used to set up alerts to remind you to pay upcoming expenses before they are due, and you’ll be able to print out the entire calendar for reference when the next tax time rolls around.
4. Use software to track and analyze your business purchases: Most accounting software programs provide options to create expense categories and link them to like items on your tax forms, which will reduce the time spent on preparing your tax returns. These programs can also be used to generate profit-and-loss statements, so you can easily assess the financial health of your business. Using software to track business expenses will save you a lot of time when the tax season comes around and you need to file your taxes.
5. Hire a bookkeeper: if you notice that your business is growing and the expenses are becoming more complicated, you should consider hiring the services of a bookkeeper to help you go through your receipts and invoices and tracking them in accounting software a few hours each month. Usually bookkeepers charge between 20 to 50 dollars per hour for their services which is quite worth it.
6. Get help: if you are just starting up with your business and you find out that you are having problems with keeping track with your expenses, then you should ask for help so that you can start up with the right foot.
7. Stay on top of paperwork: In order to deduct most expenses, you’ll need to keep record of the purchases such as receipts, cancelled checks, or bills. Spend some time at the end of the week entering receipts or downloading them from your bank or credit card website into your accounting program. Always assign expenses to categories such as advertising, utilities, office supplies, etc. You should also save any physical business receipts for 7 years in case the IRS or your tax preparer needs to see them.
8. Trim the excess: if your expenses are more than your budget, then you know that you have to sit up and take precautions. Look at each of your expenses to see where you might be able to cut back.
9. Don’t forget your vehicle: Track your mileage and other related vehicle expenses separately and update it regularly. Don’t just track how many miles it was from point A to point B, but make sure to jot down the mileage too.
10. Use accounting software: with accounting softwares you can easily balance your checkbook. But most software also come with additional functionality such as checking profit and loss statement monthly, quarterly, or whenever you need to see where your profit margin stands. It’s time to stop relying on calculators to do the accounting for your business.
Several accounting programs are available for tracking and managing expenses in a way that is easy to understand. Most of them are error-free and produce quick results. When choosing accounting software for your business, make sure to get a program that is renowned and popular among accountants.
11. Designate handling of petty cash: Designate one trustworthy person in the company to handle petty cash so as to make it easier to track the movement of your money and avoid confusion and errors. Even though handling petty cash is basically handling small amounts of money, these small amounts can quickly add up to a large amount. Set clear guidelines regarding what the petty cash may be used for and eliminate unnecessary expenditure.
12. Do Not Procrastinate: always record your receipts as soon as you get hold of them instead of waiting for them to pile up. Procrastination in this matter can lead you to lose track of your financial data. Documenting such data regularly saves you time and ensures that your records are always up-to-date.
13. Maintain a Budget: having and maintaining a budget is very important for keeping track of your expenses. Examine your weekly expenses in detail and see how well your revenues stand against them.
However, depending on the situation on ground, you may have to tweak your budget at times. If the need arises, then you should do the needful but make sure that you allocate enough funds to all the major departments of your business. In addition to that, set aside contingency funds for emergencies.
14. Know Basic Accounting: even if you intend to hire a professional to handle your accounting for you, your business will greatly benefit if you are quite knowledgeable about basic accounting tools and are actively involved in the money management of your business. Money matters a lot in the business world, knowing the financial aspects of running a venture is as important as knowing about the product or service you are selling.
Try your best to study about topics such as bookkeeping and accounting in order to gain better insight and understanding of your investments. Track the movement of cash in and out of your business; this is called cash flow. Cash refers to your money in the bank which you need to pay your employees, suppliers, and creditors with. Understating the difference and implication of a positive and negative cash flow can be very useful to the financial well-being of your company.
A positive cash flow is good for all business and it indicates that more money in coming into the business than is going out. On the other hand, a negative cash flow shows that more money is going out than is coming in and this is never good. If the trend of negative cash flow is not reversed, the business will definitely close down.
Following your cash flow will help you track your money by determining if too many of your company’s assets are tied up in inventory, if you need to collect money that is owed to you, or if there just isn’t enough inflow of cash into the business.
In addition, you will also need to study your company’s balance sheet. A balance sheet presents a snapshot of your company’s financial situation at any given point in time. It lists your business’s assets and liabilities to arrive at its net worth. It also presents a clearer picture of what your business owns and owes at any given point.
15. Plan for major expenses: always keep major expense in perspective and plan for them to coincide with when your financial calendar is blossoming instead of during periods when you are on a tight budget. It is very necessary that all business owners should know which months are slowest for sales so as to avoid unnecessary expenditure during those periods. Plan all major expenses ahead of time to prepare yourself for the extra spending. This will help avoid any unnecessary borrowing from company accounts. If possible, avoid major expenses during your slow season.
16. Record deposits correctly: you should make sure that our record all your business deposit correctly so as to ensure that you are not paying taxes on money that wasn’t even put into the business as income in the first place. Adopt a system in your office to keep all financial activities straight — know where money is coming from, as well as where it is going.
In conclusion, starting a business of your own can be quite exciting, but turning the business into a successful one can be quite a hassle. Along with the several ups there will also be a few downs. You need to make knowledge and technology work in your favor to deal with the downs. Apart from that, the above tips should help you prepare for and weather the storms by keeping your expenses low and revenues high.