6 Steps to Meticulously Track Expenses for Small Business

Tracking your expenses, documenting and analyzing them is a part of financial management. As a part of owning a small business, you must keep track of expenses and make sure that your cash flow meets your expenses. Streamlining your expenses will be a great saviour at the time of tax filing. 

When you manage your expenses, you can mitigate any looming cash gaps towards the month-end. By tracking expenses, you will be able to make better financial decisions and anticipate cash gaps and make arrangements accordingly.

In this article, we will take a closer look at how to track expenses for small businesses, right from filing, tracking to managing your expenses. Because at the end of the day, it is not how much you earn, it is how much you save. 

Expenses and their tax benefits

Business expenses are the costs that are necessary to operate your small business. These costs include inventory, rent, payroll and even stationery supplies for your office. These expenses are also called deductions in tax terms. These expenses will be recorded on the income statement and will be excluded from business revenue to estimate the net profit or loss and taxable income.

Expenses are the easy way to deduct your tax bill. In light of tax bills, different types of expenses are applied differently. So, you should always keep tabs on what and how much you spend. Small businesses, on average, that track their expenses save up to $500 a year in their tax bill. 

Steps to Track Small Business Expenses

To effectively track your business expenses, you should engage in organized bookkeeping. Bookkeeping is the only organized way of monitoring all your transactions, both income and expenditure. 

Open a business bank account

Most small business owners use their personal account to manage their business expenses. It might seem easy with minimal transactions, but it will cause too many problems when your business expands. Opening a business bank account as soon as you start off your small business is business 101. Mingling personal and business expenses makes things cluttered at the time of reconciliation and tax filing. 

Having a separate bank account, dedicated only to your business transactions makes it easier for you to track your business expenses and file them for tax deductions. Moreover, business bank accounts usually come with a line of credit that you can use to fill the cash gaps at any time in your business. 

For your small business, you should have a checking account, savings account, credit card account and a merchant service account to accept credit and debit card payments from your customers. 

Use a dedicated business credit card

Having a business credit card offers you opportunities to make big purchases when you are just starting out. However, your available credits indicate the overall financial health of your business.  Federal Reserve Study conveys that about 65% of businesses in poor financial conditions had zero credits available. 87% and 95% of the businesses with above average and good financial health had credits available. With a good line of credit, you can negotiate favourable agreements with your suppliers. 

Choose cash or accrual accounting

There are some accounting methods that businesses need to follow to file taxes properly. It is just a set of rules that every small business follows to keep its financial records organized. Small businesses with $25 million or less annual gross receipts for the three prior tax years can use either accrual accounting or cash basis accounting.

Accrual accounting is where your income and expenses are recorded when they are recognized. Entries are made when the transactions happen, not when the actual payment is made or received.  

In cash basis accounting, the entries are made only when the payment is actually made or received. Accrual accounting is the most commonly used accounting method. But it involves double-entry bookkeeping and gives an accurate and complete financial picture of your small business. 

Automate your bookkeeping

The most time-consuming part of tracking expenses is recording the day to day expenses manually on a daily basis. Manual keying always has room for errors and takes too much time and labour to record your transactions. Erroneous records may cause mismatch at the time of reconciliation and filing taxes with erroneous records may also bring you tax penalties. You might sometimes miss out on some expenses when the documentation is done manually. 

So, you can upgrade your toolkit with automated bookkeeping tools. For instance, if you are using QuickBooks for your accounting, you can use automated bookkeeping tools like PayTraQer to automatically sync all your ongoing online transactions into QuickBooks as they happen. As all the interaction happens between systems, you always get 100% accurate records and you will never miss out on recording any expense. With such automated bookkeeping tools, you can track your expenses with just a click of a button. 

Digitize your paper receipts

Tracking your expenses manually when you have a tray full of receipts is hard. You can’t ensure that you are not missing out on any receipt when the receipts are scattered. That is why OCR - Optical Character Recognition applications were built. You can scan each receipt as you receive them and upload it to your computer or directly to your accounting system. The OCR application scans your receipts, strips out the necessary information from them, and uploads them into your accounting system. This way, you will not miss out on any expenses and it is easy to track as well. 

Review and Categorize Expenses Regularly

The more a small business reviews its numbers, the better it understands its financial health. When you review your expenses at regular intervals, you become more aware of your spending and you can improve your money management. With accurate and updated financial records review, you can be well prepared for your tax season. You can generate profit and loss statements and manage your cash accordingly.

Takeaway

Now you know why and how to track expenses for your small business meticulously. Tracking expenses keeps you on budget. You can allocate your finances to where your business needs with better clarity. You will clearly know how much cash you will be having at the end of each month when you track your expenses. Follow these steps and track your expenses meticulously this year.