Tracking expenses is probably the least satisfying part of running a business. However, as tedious as it may be, it must be done — properly and accurately — to keep your business finances healthy and in good shape. Knowing how much your business spends will help you manage your finances better and make informed decisions regarding your business’s future.
But how do you keep track of your business expenses and where do you even start? Do you use a notebook or a computer? Then again, a spreadsheet or software? And what qualifies as a business expense?
Let’s find out.
Need help with managing your business expenses?
Contact Larry L. Bertsch, CPA & Associates, LLP today!
The Importance of Business Expense Tracking
Most businesses fail due to bad cash flow management. So it goes without saying that tracking your business expenses is crucial to your business’s financial health.
Many small business owners make the mistake of focusing too much on revenue and lose sight of the costs. But tracking the revenue is not enough to see whether you’re breaking even or not. To understand if your business is profitable or not you need to know exactly how much you spend.
When done accurately, expense recording gives you an honest picture of your business finances which ultimately helps you:
- Create a realistic budget
- Benefit from tax deductions
- Manage cash flow
- Be prepared for emergencies
- Plan growth, and
- Stay ahead of competitors
Cash vs. Accrual Accounting
First things first, you should pick an accounting method: cash or accrual.
Cash accounting means business expenses are recorded when bills are paid, and income is recorded when money is received.
Due to its simplicity and cost-effectiveness, cash accounting is most commonly used by sole proprietors or very small businesses with no staff. However, it also creates a distorted picture and makes it hard to create long-term plans. It’s important to note that this method of accounting is generally not accepted as valid by publicly traded companies and lenders.
Accrual accounting, on the other hand, is more complex but provides additional benefits. It reports expenses when bills are received, and income when products or services are delivered to the client — but before the money is paid or cashed in.
Since accrual accounting keeps track of accounts receivables and payables it paints a more realistic picture of a company’s profitability in the long run. For this reason, it’s the preferred accounting method among larger companies and those entities required to file audited financial statements.
What is a business expense?
In order to track business expenses accurately, you need to know what qualifies as one.
In the eyes of the IRS, a business expense is a cost that is both ordinary and necessary to a business operation. An ordinary and necessary expense is something that’s common in a particular industry, as well as helpful and appropriate for your trade or business.
If you find yourself wondering if something can be claimed as a business expense, ask yourself if it can pass the laugh test: Can you put down an expense for business without laughing about besting the IRS? If the answer is no, you’d be smart to leave that expense in the personal category.
Furthermore, a business expense can fall under one of two categories:
- Fixed – Rent, loan payments, utility bills, website hosting, salaries, property taxes, depreciation, interest, employee benefits, etc.
- Variable – Raw materials, shipping, and delivery costs, inputs to production, packaging, production supplies, commissions, wages of part-time staff, travel, etc.
8 Tips for Easier Business Expense Tracking
There are a few ways to simplify business expense tracking. The following tips will help you set a well-oiled accounting system in place that runs smoothly even as your business grows.
Create and Follow a Budget
Before you spend any business money, you need to know how much money you actually have. Otherwise, you risk overspending and exposing your business to financial difficulties.
For that purpose, you need to create a monthly and yearly budget and stick religiously to it. With your budget in mind, you can keep your expenses under control and prevent spending more than your financial capabilities allow.
Separate Your Business and Personal Accounts
Always keep your personal and business finances separate. The very first thing to do when starting a business is to open a business bank account. It protects you from personal liability if the business goes under. And more importantly, it makes tracking business expenses so much easier.
Digitize Your Receipts
Paper receipts are acceptable but digital receipt records are better. Ask for digital receipts when possible and snap and save photos of your paper receipts.
Better yet, invest in a digital receipt scanner and save yourself some precious time that you can spend in other areas of your business. Then when tax season arrives, claim the scanner as a business expense. Win-win.
Use Bookkeeping Software
Manual bookkeeping is excessively time-consuming and there are only so many hours in a day to run your business. With bookkeeping software, you can log, categorize, and track all business expenses in one place. You can also run custom reports to help you quickly analyze your accounts and budgets. This, in turn, will help you understand better where your business stands financially so you can plan accordingly.
Most bookkeeping software today allows you to connect to your bank accounts and automatically import transactions, thus minimizing the risk of any data entry errors. Moreover, for a more streamlined accounting, software like QuickBooks have add-ons to connect with other financial tools and expense tracker apps you may be using.
However, if you don’t have the budget for bookkeeping software, or your business is still at an early stage, then you can always use a simple spreadsheet. Free bookkeeping templates for Excel spreadsheets can easily be found online and offer a roadmap for setting up your business’s accounting system. While this option may require more up-front set-up time, with so many functions available, a spreadsheet will do the job just fine.
Organize and Store Supporting Documents
One thing to look for in bookkeeping software is the option to upload, organize and store any documents associated with the expenses. Come tax time, there will be no panicking because this makes tracking and verification so much easier. Everything will be in one place and meticulously arranged, accessible at all times.
Even without bookkeeping software, make sure you have all documentation stored in labeled folders and files, in a safe and dry room, and/or backed-up digitally.
Dreading tax time? Check out these business tax tips.
Regularly Review and Categorize Expenses
Keeping track of business expenses is ongoing and neverending. To ensure the records are correct and properly categorized you need to regularly review them. Make it a weekly habit, or if you’re using bookkeeping software, run monthly and/or quarterly reports.
Routine reviewing will help you catch and amend mistakes in recording that can warp your financial situation and ultimately affect your budget.
Keep Track of Price Increase Notices
Keep a close eye on price increase notices. This way you’ll give your business enough time to adjust the budget to reflect incoming increasing costs. It can be a supplier raising delivery prices, or the landlord increasing rent for the renewal of your lease. Whatever it is, you need to factor it in and plan finances accordingly.
Avoid Another Headache and Hire a CPA or Professional Bookkeeper
If all of the above sounds too overwhelming to handle on your own, save yourself time and headaches by hiring a professional!
With decades of experience, our team of CPAs and bookkeepers have the expertise to take your business from a beginner to a well-oiled accounting machine. Reach out to us at Larry L. Bertsch, CPA & Associates, and let’s talk about how our team can help keep your finances in check so you can be free to grow your business.