Whether you are a big or small business owner, if you neglect crucial bookkeeping practices, such as tracking your expenses, you will miss out on important data that can help you make wise, informed business decisions.
Keeping track of your business expenses lets you pull back, see the broad picture, and thoroughly examine your finances. Once you’ve established a reliable system for keeping track of your business expenses, you can see how well your expenses and savings compare.
This post will explain what business expenses are, how to keep track of them, which ones to track, and why you should. Keep reading to learn more.
What Are Business Expenses?
Business expenses are costs associated with running your business. They are divided into two categories, namely:
- Cost of goods sold (COGS): This entails business expenses incurred during the production of your products.
- General and administrative expenses (SG&A): These cover the regular costs of running a business as well as other necessities. They include things like rent and utilities, office supplies, taxes, advertising and marketing costs, bank fees and commissions, staff salaries, etc.
By keeping track of business expenses, you can monitor profits and losses and explore industry trends to help you forecast. And since you are aware of your financial situation and where your money goes, you can plan prudent use of funds.
How To Track Business Expenses in 6 Steps
Small businesses that keep track of their out-of-pocket expenses and regularly review their expense reports have a better understanding of their financial situation. Consequently, they have more confidence in their ability to succeed in business.
Follow the steps below to accurately track your business expenses.
Open a Business Bank Account
The first step in tracking business expenses is to open a business bank account that is only used for business-related transactions. Even though there may be times when you need to use your personal bank account for business, having a separate business account will make it much simpler to keep track of and accurately document your expenses. You will have all of your business expenses in one place, which will make it easy to claim tax deductions.
According to the SBA, business bank accounts provide personal liability protection by keeping business and personal funds separate. Additionally, business bank accounts often offer a line of credit option that can be utilized to make up for cash flow deficits.
Choose Accounting Software
The next step in tracking business expenses is to choose accounting software that can automate your accounting processes and keep track of every expense.
According to 58% of American respondents to a Robert Half survey, their companies now use either some or only cloud-based solutions for accounting and financial tasks. Whether it’s supplier invoices, rent payments, or payroll, accounting software makes it easier to track, organize, and pay expenses.
The best accounting software has reporting features that let you compare your business expenses from year to year. If you want to find out the different types of software available, the best course of action is to do some research online. Some software may be more practical for bigger organizations, while other types may provide more functionality for smaller businesses. So, when choosing software, try to choose one that allows you to compare expenses and create categories for them.
Choose cash or accrual accounting
When setting up your small business accounting system, you’ll also need to decide between accrual accounting and cash accounting.
Since cash accounting is very simple, most small enterprises, sole proprietors, and independent contractors use it. Cash accounting requires you to simply record transactions as they happen. For instance, you record income as soon as you receive them and payments as soon as you make them.
Accrual accounting is more comprehensive and is essential for growing businesses, those with employees or larger ones. Accrual accounting requires you to record income when a product is sold rather than when you receive payment for that product. The same is true for expenses, which are recorded at the time you receive the bill rather than when you pay the bill.
Connect Your Financial Institutions
Linking your financial institutions with your accounting software will make it easier to track small business expenses. Although some might feel uneasy about this option, it is highly safe and has built-in safety features to safeguard your data.
By connecting your accounting software to your banks, you can automatically download all bank transactions and even categorize your expenses. You can also integrate other features, such as downloading bank statements and importing your daily transactions, making it simple to reconcile statements.
Furthermore, connecting your accounting system with your bank accounts allows you to conduct banking transactions on your software without signing into your bank account. Thanks to this synchronization, you can spend less time tracking your expenses. Similarly, since you won’t miss any transactions, you can be sure that your income and expense records are accurate.
File Your Receipts
Make sure to file your receipts as you conduct business operations to keep accurate track of business operations. The IRS mandates that you keep all paper receipts and other records, including bank statements, for a minimum of three years. Therefore, keep paper receipts in folders and be sure to note the purpose of each transaction on the receipts. Additionally, you can label and arrange the folders in accordance with the dates or categories.
Review and categorize expenses regularly
Regularly reviewing your expenses can help you get the best outcomes from tracking your business expenses. The more often a small business reviews its financial data, and the better it comprehends them, the more likely it is to survive and expand.
Review the reports, look at the figures, and do some analysis. Take note of the trends to observe how much you spend in specific areas and how the expenses add up. Additionally, fix any mistakes and omissions.
By reviewing your business, you can learn about its financial situation and make the important decisions you need for its growth.
Conclusion
It is imperative to keep track of business expenses to have the information required for better day-to-day or monthly management and better long-term decisions around cash flow forecasting that will benefit the company’s workforce, customers, and the overall economy.
Keeping track of your business expenses will help you understand your financial situation. Therefore, take the appropriate steps to ensure no single expense is omitted. You can make better financial decisions, qualify for tax deductions, and receive other business financial assistance while maintaining an organized expense record.
Furthermore, you can consider employing the service of a bookkeeper to help you track business expenses more precisely. A professional bookkeeper will help you manage your business financial entries and educate you about your transactions and finances.