Having a business is fun since you get to make your dreams come true. But it also leads to responsibilities. Business owners have to file taxes, pay salaries and wages, keep documentation in order, and at the same time improve the company’s performance and find new directions.
One of such responsibilities is keeping track of business-related expenses. Every company generates expenses, and it’s essential to keep track of them. Keep reading the article to learn more about types of business expenses and the best ways to store this data.
Why It’s Important to Track Business Expenses
The financial stability of any corporation depends on how well it keeps books, takes care of accounting, and tracks expenses. Tracking finances enables management to understand the state and health of a company.
Keeping track of finances also reduces the risk of any inaccuracies when filing taxes. Tracking business-related costs helps companies with the following tasks.
The IRS recognizes ordinary and necessary expenses. The ordinary type is common and accepted in specific businesses or trades. The necessary type helps in a trade or business.
The great news is that most business expenses can be fully or partially written off as long as they are backed with documented proof. That’s why it’s essential to track all business-related costs and to have all the receipts. Deduction of these costs reduces the tax burden of a company.
No corporation can strive without a budget. The budget includes lists of monthly, yearly, etc., expenses. All these business-related costs are categorized for convenience.
It’s impossible to form a budget without knowing exactly how much money a company spends. Eventually, the accountant will find several inaccuracies and budget shortages. But keeping track of all business-related payments helps with proper budgeting.
PPP Loan Forgiveness
Many U.S. small businesses have participated in a Paycheck Protection Program. According to the program, companies get loans to cover losses during the COVID-19 pandemic. Participating in a program also means that all loans will be forgiven as long as money is used on the following specific business expense types:
- mortgage-related interest costs.
To make sure the debt is forgiven by the federal government, the company has to keep records and reports.
Manage and Improve Cash Flow
Having enough cash to pay for certain expenses is impossible if a company doesn’t use a proper tracking system. Experts recommend using tracking systems to optimize cash flow: both manual and automatic systems could work.
Keeping track of business-related expenses also helps with planning a wise usage of credit cards, loans, etc., to cover any shortfalls. A company may also improve payment terms with suppliers or vendors to benefit from various discounts and avoid overpaying.
The U.S. Census Bureau has an amazing tool for corporations that provides data about expenses within specific separate industries. You can track the business-related costs of your company to then compare them with benchmarks.
The U.S. Census Bureau categorizes expenses according to industry type and geographic location. That way, managers can compare their business-related costs with the expenses of other businesses in the same industry and region. If they overspend, then it’s possible to adjust spending habits and improve the company’s performance.
Spot Unnecessary Costs and Save Funds
Companies can investigate whether costs are reasonable or not instead of going with the flow. Comparing expenses within several periods enables managers to see costs increase and address the issue. If spending on certain things is unnecessary, then thanks to keeping a record of all expenses will help to use the budget with more reason.
Types of Business Expenses
Most expenses occur when running a business, for example, salaries or wages, office rent, utilities, cost of buying/renting machinery or equipment, repair of property, advertising, marketing campaigns, etc.
The majority of sources identify three types of business expenses:
Keep reading the article to learn more about each group.
Operating costs, or simply OPEX, are short-term. They occur on a day-to-day basis. OPEX category is divided into two more sub-categories:
- selling, general, administrative (SG&A);
- costs of sold goods (COGS).
SG&A includes business-related costs occurring when running a business. Here are some examples of SG&A:
- advertising and marketing;
COGS occur only if a business works in the production of goods or materials. Here are some examples of COGS:
shipping or freight fees;
- storage payment;
- direct labor to produce products;
- direct costs on materials to produce goods.
Both SG&A and COGS are paid off in the same accounting period as they occur.
The non-operating category consists of all payments that aren’t related to the basic operations of a business, but they are still needed per request. Here are some examples:
- interest expenses;
- lawsuit settlements;
- obsolete charges of inventory;
- loss on specific disposal of assets.
Not every business may have non-operating business-related payments. It depends on the industry, specific needs, and different financial situations.
Capital expenses, or CAPEX, are costs accumulated by a company to get, maintain, or optimize fixed property. Here are some examples of CAPEX:
- equipment and machinery;
Typically, businesses accumulate these costs when investing in startups, projects, or optimization of current processes to get better revenue in the future.
Tracking Expenses for Small Businesses
Expenses for small businesses are more than just coffees, dinners, trips, etc. Small companies usually have limited budgets, and it’s best to claim these expenses. Tracking and recording all costs related to running a business helps reduce the tax burden on a company.
Smaller companies need funds to optimize performance, find new directions, expand stuff, etc. It’s essential not to miss any costs that guarantee a future refund from the state.
Companies may consider using tracking apps to facilitate the overall process of keeping books. Employees have fewer chances to lose receipts if they can use an app that immediately scans and stores the receipt. The key takeaway is that tracking such costs is essential to getting a reimbursement.
The Best Way to Track Business Expenses
As mentioned, you may use two methods of keeping track of business-related costs: manual and automated tracking. It is clear from the previous section of the article that the best way is to use the software. You can choose a free or affordable application to utilize when tracking and recording every receipt.
Check the following benefits of using receipt tracking software:
- Cluster reduction. Businesses produce less paperwork and don’t have to figure out how to store documents.
- Improved security. An app stores receipts in a protected cloud. Such a storage method enables easy access to receipts. Data loss won’t be an issue.
- Immediate reports.Employees are more eager to scan and upload their receipts immediately than working with paper reports.
- Ability to work with documents from any device.
- Reports generation. Receipts tracking software often have a function that automatically generates reports about a company’s spending habits.
- Reduced risk of losing receipts and making mistakes when filing reports.
Undoubtedly, using software is a better and more convenient option. But check what other optimizations you can implement to improve its performance.
Tracking and Keeping Business Expenses: Useful Tips
If you’re looking for ways to optimize your expense tracking strategy, consider the following easy tips.
Open a Separate Bank Account
It’s a great option for both freelancers who work with partners and small businesses. To ensure separation between personal and business expenses, open a separate account. When it’s time to file taxes, you will be grateful that you have used this tip.
A separate bank account ensures that all transactions are related to running a business. To make use of this tip, make all business-related purchases only through the newly created account. Online banking often offers simple tools to calculate budget, income, and loss, so the tool can come in handy.
Experts also recommend creating a separate credit card for business expenses. When choosing a bank or credit card, pay attention to bonuses. You may get cash back on business purchases and save more funds than expected.
Keep Receipts Properly
If a company prefers tracking receipts manually, then here are some tips:
- Have separate folders for paper receipts. This tip ensures you won’t lose any receipts and can use them to reduce the tax burden.
- Use binders to separate receipts by month. Experts also recommend labeling each category by adding the month and year.
- Regularly add information about these transactions. The best option is to immediately add expenses as they occur, but not everyone can commit to this task. The next best option is to set a day every week to add receipts.
If a company uses trackers, then the task is easier. Here is what you need to do:
- Scan the receipt.
- Upload a digital receipt to cloud storage.
- Add the receipt to a folder.
Make sure you create separate folders for each month.
This option is mainly applicable if a business has just started its work. Creating a spreadsheet is a good way to keep track of business-related expenses. The best way to apply this method is to add all related costs to the spreadsheet immediately or at the end of the business day.
Creating a spreadsheet requires making separate categories and columns then filling the information in these columns. Typical columns to track costs include:
- transaction date;
- transaction purpose.
As the company grows up, it becomes impossible to keep track of every business-related deal by using spreadsheets.
Consider Cloud Accounting Software
More than 90% of small companies transferred from manual to automated storage of receipts in 2020. One of the reasons is COVID-19. Business owners face the need to work remotely, and cloud software is perfect in such a case.
As mentioned, tracker apps are far more useful and safe. Consider using a free or affordable app to improve your business.
The key takeaway is that keeping track of expenses is a must. Experts recommend revising tracking strategies to ensure that the business meets its full financial potential.
Author: Charles Lutwidge