There are many moving parts when it comes to running your business. Perhaps among the most important is knowing exactly where your business expenses stand. You need to be on top of all aspects of your accounting—this not only helps you monitor cash flow (that which you need to survive) but also is invaluable when it comes to understanding tax deductions that could save you a good amount of money in the long run.
First off, it’s key to understand what a business expense is; that is to say, what qualifies as such an expense for your accounting purposes. Essentially, these expenses are anything that is directly tied to operating and maintaining your company. So for instance, the more obvious ones such as wages, rent/mortgage, inventory purchased. Things of this nature are of course going to be considered acceptable expenses.
Business expenses are generally broken down into two separate categories: costs associated with goods sold, which is connected to making the actual product. And then there are also operating expenses; this would be rent, payroll, permits, and so forth. When keeping track of these expenses always make sure and separate your business from your personal. Business expenses can qualify as deductions, which in turn decreases the income upon which you will have to pay taxes. This is why tracking expenses is so critical for any company. Not to mention, as you track the numbers, you also want to be diligent about categorizing as you will have to do this in order to prepare your tax return.
Beyond the obvious, as noted, there are actually many different types of expenses that can stand as deductions that a business can take. The IRS stipulates that that which can be deducted are those expenses that are ordinary and necessary to carry out business. Some of the more common ones that companies tend to use as tax deductions:
- Payroll and associated costs
- Employee benefits
- Any home office deductions that apply
- Rent/mortgage payments
- Equipment depreciation
- Retirement contributions when applicable
Again, in order to maximize the deduction, you want to have a thorough accounting and record of each. Come tax time you can then itemize your deductions and consequently lower that tax bill. Tax season can certainly get a bit hectic for many business owners; this is precisely why accurate record-keeping throughout the year is so important. It saves so much time, energy, and hassle in the end. Plus, if you track expenses as you go, you are less likely to miss something that could actually be listed on your taxes and thus save you even more money.
The key to tracking business expenses
So we now know why you should be tracking those business expenses all along, so what are some tips for the best ways in which to keep tabs on what you spend. The first step again is to ensure that you are not intermingling business with personal expenses. This is why you want a separate dedicated bank account for the business itself. It simply makes it so much easier to distinguish between the two in this way.
Without exception, all of your business expenses should be paid with this separate account. This gives you a more accurate view of where the company’s finances stand, where cash flow is, and it also makes it so much easier to prepare your taxes because all relevant financials are there without being mixed in with any personal records.
Excel is one easy way to track your business expenses. That said, as the business grows, Excel may not be the best tool as it is more susceptible to human error than some other programs out there. With the advent of cloud-based accounting software, much more gets automated as far as tracking expenses go. Not to mention, this type of software makes it easier for you to stay organized in terms of your financials. It’s all about accessing the tools and resources that make this job easier for you in the long run. With cloud software, you can even add expenses on the go versus returning to the office and manually inputting them. Plus, by utilizing more advanced software for tracking expenses, tax records are also more secure and more manageable.
Benefits of tracking business expenses
Beyond of course the ease of preparing taxes, there are other benefits associated with careful expense tracking. For one, it gives a business owner a better overall handle on their cash flow. Businesses require a positive cash flow in order to survive. Therefore, understanding where the expenses stand in terms of what you have coming versus gong out in is absolutely crucial. A huge reason why so many businesses fail very often is that they did not keep tabs on their cash flow and subsequently mismanaged it. Daily expense management is the key to understanding exactly where the numbers stand.
Additionally, by tracking those expenses, you gain a clearer picture of how well the business is doing in general. You’d be surprised at how many owners are somewhat uncertain regarding their financial picture. This often is because they fail to follow their numbers closely. They have no idea where the money is going or how much of it is going out.
Another benefit to tracking expenses: you have the records ready to present to a lender should you require a business loan. This ultimately helps improve your chances of qualifying. The percentage of profit is one of the key things that lenders will look at in evaluating your application. So yes, being profitable is important; however, if you’re not keeping accurate and timely records, painting a picture of that profitability becomes more difficult.
Tracking business expenses helps you succeed
Regardless of what stage your company is in—early or later stage—you without question have to have a system in place for keeping track of all relevant expenses. Again, this helps when it comes around to tax season, it helps for preparing a loan application, and in general, it helps you see what you may need to do with the business to get things back on track should you be hemorrhaging money. If you note a dip in cash flow, this is when you go back to the drawing board and figure out where to cut costs. And on the flip side, if things are looking good then you may want to explore opportunities for expansion.