Many small businesses have difficulty tracking business expenses. Actually, a study discovered that bookkeeping services is the very least favorite job for nearly 46% of business owners. Failure to track expenses correctly affects financial clarity and can result in steep penalties. The Internal Revenue Service (IRS) assesses a 20% accuracy-related penalty on underpayments because of neglect or ignoring rules.
However, with the proper tools and strategies, tracking business expenses could be a manageable and easy task. This blog offers steps to simplify expense tracking and keep you organized and compliant without stress.
Steps to Track Business Expenses With Ease
Below are 9 steps to track your business expenses with ease:
1. Understand the Importance of Expense Tracking
Before you dive into methods, first understand why tracking expenses is essential :
- Tax Compliance: Proper records help you justify deductions and stay away from penalties.
- Monetary Clarity: Knowing where money goes helps with planning and budgeting.
- Audit Preparedness: Well maintained records can quicken the audit and reduce liabilities.
Remember, consistent expense tracking is more than staying away from penalties: it helps in making smarter business choices for your growth.
2. Separate Personal and Business Finances
Mixing Personal and business expenses can create confusion and possible legal problems. To maintain clear boundaries:
- Open a Business bank account: This tracks Business earnings & expenses.
- Use a Business credit Card: It helps with expense categorization and building Business Credit history.
Keeping finances separate simplifies bookkeeping and projects a far more professional reputation to clients and financial institutions.
3. Use Accounting Software
Modern Accounting Software can automate expense tracking. A survey by Clutch found 62% of small businesses have in-house accounting teams and many use accounting software to handle finances. Popular options include:
- QuickBooks provides invoices, expense tracking and reports.
- FreshBooks: Simple interface and time-tracking.
- Wave: totally free for small businesses with basic accounting needs.
Such tools can connect to your bank accounts, group costs, and produce financial reports - all without sacrificing time or even making mistakes.
4. Reconcile your Accounts
Frequently Reconciling compares your financial documents with your bank statements. Regular reconciliation helps in:
- Detecting Discrepancies: Finding unauthorized transactions or errors.
- Accuracy: Making sure that all expenses are entered correctly.
- Keeping Cash Flow Awareness: Knowing your real financial situation.
Try reconciling accounts monthly.
5. Keep Digital Copies of Receipts
The IRS suggests keeping data for 3 years at minimum. Digital storage of receipts keeps them accessible and organized. Use Receipt Scanning Apps:
- Tools like Shoeboxed or Expensify can digitize and group receipts.
- Cloud Storage: Save scanned receipts in services like Google Drive or Dropbox for later retrieval.
Digital records save physical space and allow for quicker access when tax preparation or audits.
6. Correctly Categorizing Expenses
It helps understand spending patterns and makes tax filing simpler. Common categories are:
- Office Supplies.
- Expenses for Travel.
- Utilities.
- Marketing & Advertising.
- Professional Services.
The majority of accounting software enables you to define categories and then create categories so expenses are correctly allocated.
7. Establishing a Consistent Tracking Routine
Consistency is crucial in expense tracking. Make a routine work for you:
- Daily: Record expenses as they happen to prevent backlog.
- Weekly: Schedule time every week to review and classify expenses.
- Monthly: Examine and reconcile accounts and evaluate financial health.
Routines reduce the risk of errors and maintain current financial records.
8. Learning about Tax Deductible Expenditures
Understanding what expenses are deductible could save you a lot. Common deductible expenses include:
- Home Office Costs: If you use part of your house for your work.
- Vehicle Expenses: For business trips.
- Meals & Entertainment: In relation to business activities directly.
- Professional Development: Courses or seminars on business.
See the IRS guidelines or consult a tax expert like The Fino Partners to ensure you are obtaining most deductions legally.
9. Hire a Professional
If expense tracking gets way too overwhelming, consider hiring a bookkeeper or accountant. They can:
- Maintain accuracy: Professional oversight decreases errors.
- Give financial Insights: Help with Financial planning and budgeting.
- Assist in Tax Preparation: Ensure all deductions are claimed and forms are submitted.
There is a cost, though the time saved and potential monetary advantages oftentimes outweigh the expense.
Also Read | How Can I Lower My Tax Bill Legally as a Small Business Owner?
Conclusion
Tracking your business costs need not be complicated or stressful. Opening separate business accounts, utilizing expense tracking software, saving receipts digitally and creating a routine helps you stay on top of your finances without feeling overwhelmed when it is time to file taxes or even apply for business funding. Additionally, they help you avoid IRS fines and make far better business choices. In reality, businesses which track their expenses are more likely to be profitable in the long term. So get organized now and don't hold out till tax season. Begin right now, using tools that suit your needs and make expense tracking a practice that aids your business’ success.
