How has your business been performing this year? If you don't know how to track business expenses properly, you could be facing a gap between how you think your business is doing and the actual health of your company.
Tracking your expenses will give you a clear, accurate picture of your company's strengths and weaknesses and will save you time (and a headache) during tax season.
Here's how the pros keep track of their expenses and stay in charge of their companies' financial health.
What business expenses do I need to track?
Business expenses cover a broad range of costs. You can classify any money you spend maintaining or growing your business as a business expense, whether it's paying rent, payroll, purchasing new inventory, or the interest paid on a small business loan.
Which of these business expenses do you need to track? All of them. That's why small business owners prefer to place their expenses into specific categories to stay organized.
Fixed expenses refer to those expenses that don't change month-to-month. These fixed expenses usually include your operating expenses, salaries, and rent and mortgage payments. This regularity makes fixed expenses the easiest to track, though they're often more challenging to save money on since they tie to contractual agreements.
Variable expenses refer to expenses that don't remain constant. They can include business purchases for meals, office supplies, or additional inventory. Fees on your business credit cards are usually classified as variable expenses.
Period expenses come at regular intervals instead of being organized around discrete financial transactions. They can be fixed (mortgage, rent, certain insurance policies) or variable (utilities, banking fees, etc.).
Interest can be fixed or variable, depending on the type of financing that the interest is attached to. It's essential to keep track of your interest payments since this will likely represent a significant business expense.
By keeping tabs on your interest payments, you'll be able to see how efficiently your company is utilizing its loans or how much money you're losing through the borrowing portion of your budget.
Depreciation is a tax-deductible expense, so calculating the depreciation of your major assets can help you save money when filing your business taxes. It can also help you determine the return on investment when replacing major items, such as office furniture, electronic devices, or commercial vehicles.
How to track small business expenses
Tracking business expenses should become a part of your routine as a small business owner, but let's face it: it's not as easy as it sounds. You're already juggling multiple responsibilities as a business owner. The following steps can simplify the process and help you and your company stay organized.
Open a business bank account
Start by separating your business and personal expenses. Mixing your business and personal finances will not only lead to confusion, but it can put your personal assets in jeopardy should your business take a downturn.
The best way to accomplish this is by opening a separate bank account. Many local banks allow you to open a dedicated business bank account. However, you'll have no trouble finding online-only banks that provide a business credit card and other benefits aimed at the needs of small businesses.
Plus, you can link your business bank account or credit card with your accounting software so that you can import transactions and your expenses update automatically when bills come due. This approach will simplify the process and notify you about bank account activity, so you're aware of your business expenses.
To open a business bank account, you'll generally need to provide:
- "Doing business as" (DBA) name
- An employer identification number (EIN)
- Social Security number (SSN)
- Business license
- Foundational documents (e.g., articles of incorporation)
Keep in mind that if you operate a limited liability company, you're required to open a separate business bank account.
Here's a tip: open multiple business accounts. You can use one business account for your regular business transactions and another for income.
Choose the right accounting software
Make life easier for yourself by relying on technology. When your business is small, you might be able to track expenses using an Excel Spreadsheet. As your business grows, you'll likely need the advanced support of an accounting software platform.
The good news is you've got options. Today's accounting software providers have a range of products to choose from, and cloud accounting software allows you to access your company data with a swipe of your finger. Many platforms allow you to calculate sales tax and easily receive online payments.
Invoice2go, for example, offers advanced reporting tools that provide a snapshot of your company's accounting data. You'll be able to track your unpaid invoices and manage your cash flow right from the app. Our platform can integrate with your preferred accounting software platform to deliver cutting-edge solutions to tracking business expenses.
Keep track of all of your receipts
Tracking expenses usually involves keeping tabs on all of your receipts. Saving your receipts can help you:
- Record business expenses
- Validate your tax deductions
- Reconcile your bank statements with your books
For years, tracking business expenses meant keeping a folder or shoebox full of paper receipts. Thankfully, there's a more accessible, more reliable system. Utilize a business expense tracker app to help you track expenses. The best expense tracker apps allow you to scan paper receipts and store your digital receipts in a file for access later.
Of course, retailers may already have a point of sale (POS) system to store digital receipts. You can often integrate these systems with your other accounting tools to simplify how you do business.
Choose an accounting system
Choosing your bookkeeping system might not be as exciting as a gender-reveal party, but it has a significant impact on how you record income and prepare for tax time.
You'll be choosing from two different accounting methods:
- Cash basis accounting (or simply the "cash method")
- Accrual basis accounting (or simply the "accrual method")
Many small business owners prefer cash-based accounting since it's more straightforward. In this method, you'll simply record business income when you receive it and record expenses when you spend money.
The catch is that this doesn't always provide an accurate picture of your cash flow. For example, imagine that you worked hard in February but were not paid until March. On paper, it will look as though March was your busier month since you received payment.
In the accrual method, you'll record income and expenses as they happen, not necessarily when money changes hands. This process is referred to as double-entry bookkeeping since you'll be recording two entries for each transaction: one entry for the transaction itself and another for when you officially receive the money.
This approach can be a more accurate bookkeeping method since you'll know when your expenses are occurring and not simply when you're making payments.
Set up payroll
To effectively track your business finances, you'll need to account for payroll. If you're a solo entrepreneur, you can skip this step, though you may want to consider how any future hiring decisions might influence your expense tracking strategy.
Small businesses are usually required to withhold the following from their payroll expenses:
- Federal income tax
- Medicare and Social Security taxes
- State and local taxes
- Unemployment taxes
This withholding is why having software devoted to payroll can help you manage these expenses, saving you time and keeping your business running smoothly.
Plan ahead for tax time
According to one survey, 40% of small business owners spend over 80 hours per year on tax preparation. Expense trackers can maintain records of your expenses so that you'll spend less time digging through receipts at tax time.
For sole proprietors, the process can be surprisingly straightforward. Profits from your business are passed on to you (known as "pass-through taxation"), which means that your business will not file its own business income tax return.
Before you celebrate, this means that you must record your profits on your personal income tax return as taxable income. Since you're a sole proprietor, you'll also be responsible for paying self-employment taxes.
This requirement is why it's so important to track your business expenses. Proper expense management won't just maximize your profits; it can also help you identify business expenses that can reduce your tax burden.
Review your expenses regularly
Your expense tracking strategy should include time to regularly review your business finances and evaluate the health of your business. This undertaking means you'll spend time looking over your financial statements and expense reports, ensuring that no errors need to be addressed.
How often should you review your business expenses? It would be best if you aimed to reconcile your bank accounts at least once a month. Keeping up with your business finances will help you identify problems as they occur and prevent minor mistakes from snowballing into major problems.
Reviewing your business expenses can also help you strategize for the future, which is why it's helpful to track your business expenses through a software platform that can give you a comprehensive picture of your company's success. You may discover ways to streamline for the future, as well as find cost savings for your various operating expenses.
The data you need and the simplicity you want
Invoice2go a Bill.com company offers some of the most innovative small business tools on the market today. You can use our reporting features to stay on top of your company's cash flow and put your record-keeping process literally in the palm of your hand with our customized app.
But this is only the start of the features we offer. Invoice2go also provides an intuitive invoicing platform that you can use to create and send customized invoices to your clients and get paid faster by sending automated reminders and receiving electronic payments.
These features can be yours for free when you sign up for our trial offer. You'll have 30 days to explore our expense tracking, invoicing, and other financial features that can bring efficiency and simplicity to your business.
Frequently asked questions
Our above tips can help you get organized, but we understand that you may have some lingering questions. Here are some of the most common questions we hear about tracking business expenses:
The good news is that most of your everyday business expenses can be used for tax deductions, though, as always, you'll need to ensure that you save all of your documentation carefully. Everyday tax-deductible expenses include:
- Business taxes
- Payroll expenses
- Employee benefits
- Home office expenses
- Insurance premiums
- Rent/mortgage payments
- Retirement plans
- Depreciation of equipment or company vehicles
- Interest payments
However, you can't deduct other business expenses. These include such things as:
- Educational expenses
- Fines and legal fees
- Political contributions
- Capital expenses
Consult a qualified tax advisor if you're unsure of whether an expense can be deducted from your tax return.
You should store your receipts for at least three years, especially if you use them to itemize deductions on your tax return. Receipts should be saved for three years from the date you file your tax return, not the date recorded on the receipt itself.
Three years is generally the window of time that the IRS has to review your paperwork and perform an audit, though keep in mind that if you're suspected of fraud or some other financial crime, this period may be extended.
Don't confuse receipts with your actual tax records, which should be stored for a period of at least seven years from the date of filing. However, the IRS technically has no official statute of limitations if they suspect you of committing some fraud. Some business owners digitize their business records and store them digitally to have them ready in the event of an audit. Here is an article that goes into detail about how long to keep tax records.