Tracking business expenses can be tedious. Without proper attention and strategy, small business owners can quickly fall behind in keeping their financial records up to date.
Tracking your business expenses allows business owners to easily see the whole picture of their business’s finances. Accurate bookkeeping will allow business owners to predict when they’ll break even, calculate their quick ratio (their ability to pay back debts with only cash or assets that can be quickly converted to cash), and explore trends in their finances.
Additionally, tracking your business’s expenses throughout the year will help ensure that you and your accountant can file your business’s taxes as easily and accurately as possible come tax season.
Tips and tricks to better keep track of your business’s expenses include:
- utilizing accounting software,
- digitizing all your receipts,
- establishing a business bank account and credit card,
- regularly reviewing and categorizing all business expenses.
Cloud-based accounting software makes it easy to monitor, organize, and pay expenses. They also cut down on the work required to track expenses and increase the accuracy of your bookkeeping. Accounting software provides functions such as automatic categorization of expenses and automatic reports. These reports give business owners valuable information based on the expenses they tracked, such as data on money spent on each category of expenses and year-to-year comparisons.
Utilization of cloud-based accounting software provides business owners the added benefit of on-the-go access to their business’s financial information. This functionality allows business owners to add expenses, run reports, etc., from their cell phones. Easy accessibility can be a major advantage for busy business owners who are often on the go and might not be able to make it to the office just to review their business finances or add an expense to their tracking software.
The ability to update expense tracking also increases the likelihood that your businesses expenses will stay up to date. For example, business owners or employees who take a client to a business-related lunch can add that expense to the software in real time from their cell phone instead of having to wait until they get back to the office.
Finally, cloud-based software keeps your financial records secure, should you ever be audited. Spreadsheets or other documents may disappear if your computer crashes, paper files may get lost or destroyed, but data stored on the cloud provides the peace of mind that it will always be accessible, from multiple locations. Security and peace of mind are important in ensuring your business stays up to date and accurate in tracking expenses to prepare for tax season.
Sitting down with a pile of paper receipts and organizing them into proper categories at tax time can create a major headache. Paper receipts can present issues such as hard-to-read crumpled text or faded ink. Digitizing receipts can help to eliminate these problems, or at least alleviate some of the burdens.
One method for digitizing receipts is utilizing one of several mobile apps that allow business owners to scan receipts with the camera on their smartphone. Oftentimes these apps are either included in or compatible with one of the many different accounting software available to business owners.
While a mobile app that scans and digitizes receipts can be very convenient, many business owners find purchasing a desktop receipt scanner to be a valuable investment. A separate receipt scanner allows business owners to scan a document, review it, and categorize it.
These scanners also provide the option to either manually categorize receipts or allow the scanner’s software to separate the contents of each receipt into defined fields in the accounting software. Just like the mobile apps that scan receipts, dedicated receipt scanners easily connect with most accounting software systems.
Specific Business Accounts
When tracking your business’s finances for tax purposes it is vital to ensure that they remain as accurate as possible. Keeping your business and personal finances separate is an absolute necessity. To do this you should open a dedicated bank account and credit card for your business. This is particularly important for smaller businesses, such as sole proprietors or freelancers, where the line between business and personal finances may easily get blurred.
If your business is incorporated, or if your business anticipates either sending or receiving checks in its name, then you will need an account that is offered explicitly as a “business bank account.” Establishing a separate bank account for business expenses makes it easier to track each expense and later claim them on your tax return. With all business expenses in one spot, there is no need to filter between business related expenses and nonbusiness related expenses.
A business will need its federal identification number (EIN) to open a business bank account, while a sole proprietor may use their social security number to open an account.
It is also a good idea for a business to open a checking account, savings account, and a merchant services account (which allows businesses to accept credit and debit card transactions). The additional functionality of each account adds further layers to tracking finances. For example, your merchant services account allows you to easily see all credit and debit card transactions in one place. The existence of a checking account dedicated to payroll allows you to easily track and monitor that area of your business’s finances.
Your business should also open a credit card in its name. Having a dedicated business credit card, in the business’s name, allows the business to develop a credit history to allow the business to receive financing when needed. Having credit will also aid the business in making necessary start-up purchases. Credit cards also offer additional perks, such as business rewards or travel credit.
Additionally, you can connect your accounting software with your business’s bank account and credit card account to add additional ease to tracking your finances.
Likely, the most important thing you can do as a business owner is to get in the habit of reviewing your expenses regularly to ensure all transactions are properly categorized. This regular review ensures that all your finances are tracked properly and in order when it comes time to file your taxes. It will also allow you to catch errors or any impropriety that may happen early and correct it before it becomes a larger issue.
While all the technology available makes the day-to-day process of tracking expenses easier there is no substitute for manual review and establishing the habit of reviewing your accounts regularly will be beneficial in the long run.
Properly tracking your business’s finances is not the most exciting or fun task. However, taking the necessary steps to track your business’s finances accurately and efficiently will aid in the development and growth of your business. It will also prepare your business throughout the year to be able to accurately file taxes come tax season.