Who knew running a business would be so complicated? There are so many things to deal with and so many details that you always find some things slipping your mind…even important things like business expenses.
Where does the money you earn go? It sometimes seems like you spent it all on things you can’t figure out. Tracking business expenses will not only give you a level of financial awareness but help you stay on top of your taxes as well.
In this guide, we’ll help you understand how to keep track of business expenses, and why you need to do it.
The Importance of Tracking Business Expenses
Knowing where your business stands financially is vital to its success as you’ll understand what works and what doesn’t. You’ll be able to predict future business expenses and curb unnecessary costs that you can do without.
It also makes mapping out your cash flow easier. Given that cash flow problems are a major reason why many businesses fail, having a clear understanding of it is crucial.
How to Keep Track of Business Expenses
Keeping track of business expenses is easy as long as you have the right tools and software. The fact that there are digital tools makes things seamless, and you don’t even have to hire a professional unless you have a lot of bookkeeping to do.
Let’s look at the step-by-step guide on tracking business expenses.
Start by Opening a Business Bank Account
It’s imperative for you to have a business bank account, so if you’re yet to separate your business and personal finances, it’s about time you do it.
All your business income needs to go to a dedicated business account, and you need to use either a business card or checking account for all business-related purchases.
If your business is still relatively small, you may feel like you can manage one account. However, it’s easy to use some of the money for your personal needs, so draw a clear line now. Beyond that, if you’re not issuing checks yet, there may come a time when you need to do it.
Having a dedicated business card also makes tracking business expenses easier because you won’t have to separate personal and business expenses from the same receipt.
Digitize Your Receipts
If you’ve yet to do your taxes, then we’ll tell you in advance that using crumpled receipts is an overwhelming and unpleasant ordeal you’ll want to avoid. It’ll be hard to tell what receipt goes with what expenses, more so if you don’t separate your personal and business accounts.
When you digitally capture your receipts, filing will be a breeze. You should get into the habit of filing a receipt as soon as you make a business expense to avoid forgetting it.
Get yourself a receipt scanner and account for all your receipts each time you receive them. If ever you get audited, you’ll have all the receipts safe in your digital files and you can show them to the IRS.
Use Software to Keep All Expenses in One Place
Accounting software is important if your business is too small to hire an external accountant. Accounting is challenging for most, but with this software, you can create useful reports that will help you understand your finances and where your business stands. This will help you make informed decisions.
Categorizing your expenses is easy, but it’s even better if you do it as soon as they are incurred. This way, you won’t forget what it was spent on. Most accounting software programs have apps that help track and categorize business expenses on the go using mobile devices.
One of the best things about having a software program is that you’ll have all your expenses in one place, unlike using spreadsheets, and this will save you during tax time. Now, if your business is registered and you charge and recover sales tax, you need to add applicable sales tax while categorizing your expenses.
Apart from taxes, you can also keep track of other business expenses, such as insurance.
What does business insurance cover? There are several different types of business insurance and it all depends on your type of business. You can have general liability insurance, professional liability insurance, product liability insurance and so forth, but you need to keep track of those expenses as well.
Choose Between Accrual and Cash Accounting
While setting up your accounting software, you need to choose between accrual and cash accounting.
If you’re a freelancer, a sole proprietor, or a small business, then you may benefit from using a cash accounting system. It’s quite simple to use, and you only record payments when made, and income when received.
An accrual accounting system, on the other hand, is quite in-depth and more ideal for a growing business. If you are looking into hiring more employees and increasing production in the near future, then an accrual system will work better for you.
With this accounting system, you record when products are sold and not necessarily when you receive the payment. Bills are only recorded when received, and not necessarily when paid for.
Connect the Software to Your Bank Account
Now that you know how to keep track of business expenses, you can make it even easier by connecting your bank account to the accounting software. Importing transactions will not only be seamless but automatic as well.
Having all transactions imported to the software as soon as they happen will help you keep track of business expenses. It’s unlikely that you’ll miss a transaction, especially since you have separated your personal and business bank accounts.
All you have to do is check the accounting software and ensure that all expenses have been recorded under transactions. Beyond that, you’ll just have to categorize them and link them to the relevant receipts. This will minimize the chances of you looking over anything.
Tracking Business Expenses Is an Essential Part of Business
Once you learn how to keep track of business expenses, everything else becomes easy. The most important thing to keep in mind is that expenses need to be recorded promptly to avoid problems in the future.
Whether your business is just a hobby or you have plans of growing to a multi-billion conglomerate, keeping track of business expenses is one of the best things you could do.
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