Regrettably, expense tracking is among the least favorite tasks for many business owners, and they wait until the tax season to do it. Although reporting expenses can be strenuous and time-consuming, it is worth it.
Here are the benefits of tracking your business expenses and some great tips on how to hack it.
Benefits of Expense Tracking
- It helps in cost control as you can determine the amount you are spending and where it is going. Expense tracking can help to fix bad spending habits and improve your financial health.
- It prepares you for the tax season: the tax season is a dreaded time for many unprepared business owners. When you track your expenses, the tax season will not be overwhelming as is normally the case. You don’t have to run up and down searching for invoices and receipts in shoe boxes. Tracking your expenses may give you money back on expenses like office supplies, rent, and utilities. You will get the most deductions possible to lower your taxes.
- It paints a clear picture of your operations costs. This way, you can calculate your profitability seamlessly.
- Use the insights gained from expense tracking to inform business decisions and plan for the future.
Now that you know why you should track business expenses, here are a few ways to do it.
- Separate Business and Personal Expenses
Some business owners make the mistake of marrying business and personal expenses. They argue that after all, they are their expenses. However, it is best practice to keep business and personal expenses separate. This way, you have no trouble determining whether an expense is personal or business-related. Also, in case of a tax audit, you don’t experience difficulties differentiating the various expenses. Importantly, ensure you have a different account and credit card for the two.
- Know What a Business Expense Is
You cannot track what you don’t know. As such, ensure you understand business expenses to report them effectively. Some business expenses are tax-deductible, and hence it pays to know which ones they are. For example, if you are meeting a client over lunch, that’s a business expense. Nevertheless, if you take the client to a baseball game afterward, that’s not a business expense. If you are unsure of what entails a business expense, consult your accountant or tax attorney.
- Automate Your Expense Reports
The number one way to track business expenses is to use technology. Automating your expense reporting using accounting software is an excellent place to start. Accounting software puts your finances in order and promotes accountability. With this software, you can generate monthly or quarterly expenditure reports to see where your money is going.
- Keep Employees Accountable
You cannot track your business expenses effectively if your employees are not on board. You must develop a process of making employees accountable for the costs they incur on behalf of your business.
For example, if your employees incur business-related expenses such as paying for office supplies, having lunch with a business partner, or traveling to meet a client, they must provide records to get reimbursed. This way, you only pay for genuine expenses while promoting transparency in your business finances.
- Keep Good Records of Expenses
Keeping a record of your expenses will go a long way in helping you track your business spending. Ensure you keep your invoices and receipts safely. Whether you made an online purchase for office stationery, used a check to pay a bill, or cash to pay for lunch at a business meeting, ensure you keep these records.
Consider using a scanner or your smartphone to keep receipts to save you the hustle of storing and retrieving them manually. Numerous apps let you store receipts digitally including eBillity’s Time Tracker +Billing. Keeping good records of expense reports will help you with tax compliance when the tax season approaches.
- Be Timely
Ensure you record your expenses promptly. It will save you time in the long-run as you won’t have to deal with piles of receipts. You don’t want to go through your business credit card and find purchases you can’t recall making. Also, you won’t risk forgetting the expense or losing the record.
- Use Business Credit Cards
Business credit cards can simplify your expense reporting by breaking down expenditure monthly, quarterly, and annually. They also record transactions in real-time for streamlined expense tracking. Business credit cards can be handy in the event of an audit.
- Make it a Habit
Don’t wait for the tax season to start scrambling for receipts and trying to remember all expenses. Instead, make a habit of tracking your business expenses every time. Make it second nature to write every purchase and document receipts.
- Hire a Bookkeeper
When you don’t have the skills to handle accounting, hiring a bookkeeper can be handy. The bookkeeper keeps up with your business finances, including expense tracking. They can also offer financial advice and help you capitalize on opportunities and evade issues. Consider hiring a freelancer to do your bookkeeping if you don’t need a full-time bookkeeper.
- Review Expenses
Do not just track your expenses. Make an effort to review the expenses to see where you can cut costs to increase profitability. It is best practice to assess your expenses quarterly for the best results.
Tracking your business expenses is a vital part of ensuring the success and survival of your business.
It not only helps you when the taxman comes knocking, but also aids in cost control and informs decision-making. By recording expenses, examining trends, and acting on them, your business will run efficiently. Forget about the hassle of tracking your spending.