The Importance of Business Expense Tracking:
A Guide for Small Business Owners
If you’re like most small business owners, the idea of tracking business expenses probably doesn’t excite you. We hear this a lot as accountants we are the opposite, we hear of our clients postponing this task until tax season looms, leading to last-minute stress as they scramble to organise their financial records.
We always say to our clients: “How much time and stress could have been saved if they had been just a little more diligent, or even employed us to take on this task for them.”
Business expense tracking might seem mundane, but its benefits extend far beyond making tax season smoother. In this blog post, we’ll explore why tracking business expenses is crucial and how you can simplify the process without relying on cumbersome spreadsheets.
Why Business Expense Tracking is Important
- Better Control Over Cash Flow
Cash flow, the total money flowing in and out of your business, is vital to your business’s health. Maintaining a positive cash flow (more money coming in than going out) is crucial, as a lack of cash is a common reason small businesses fail.
Daily business expense tracking ensures you have a clear picture of your cash flow throughout the month. By monitoring how much money is leaving your business, you can quickly identify and address any shortfalls. This enables you to adjust spending and explore ways to increase income, ultimately ensuring you have enough funds to cover bills, avoid late fees, and support business growth.
- Responsible Spending and Budget Adherence
Tracking business expenses daily helps you better understand your spending patterns. By comparing daily figures to your budget, you can see where you’re over or under-spending and make necessary adjustments. This process not only improves your financial awareness but also helps you develop better spending habits, saving money and freeing up cash for other essential business areas.
- Easier Tax Preparation and Potential Refunds
Tax season can be stressful if you’re not prepared. By keeping accurate records, you’ll have everything ready when it’s time to file your taxes. This not only reduces stress but also ensures you don’t miss out on potential deductions. Many business expenses are tax-deductible, such as:
- Business lunches and meetings
- Cell phone and internet costs
- Professional services fees
- Travel expenses
- Office supplies
- Rental payments
- Advertising and marketing
- Charitable contributions
- Business insurance
- Home-office expenses
- Accurate business expense tracking throughout the year maximizes your tax returns, making tax season a more positive experience.
- Accurate Profitability Assessment
Understanding your business’s profitability is essential for attracting investors, securing loans, and managing day-to-day operations. However, many business owners struggle to calculate profitability accurately due to poor business expense tracking. By diligently tracking expenses and income, you can easily determine your profitability without guesswork, ensuring your financial statements are accurate and reliable.
- Keeping Employees Happy
If you have a team, they likely submit expense claims for reimbursement. Promptly reimbursing these expenses keeps your employees happy and reduces administrative hassles. Regular business expense tracking allows you to process these claims efficiently, maintaining a positive relationship with your team.
How to Track Business Expenses Effectively
- Review the Competition
Before creating a budget, research average expenses in your industry. This helps you set realistic benchmarks and identify areas where you might be overspending.
- Categorise Your Expenses
Create a spreadsheet or use accounting software to categorise your expenses. Common categories include rent, taxes, raw materials, and marketing costs. Categorising expenses helps you see where your money is going and identify areas for improvement.
- Break Down Expenses
Review your expenses on a daily, monthly, and annual basis. This helps you understand spending patterns and make informed decisions about cost-cutting when necessary.
Simplify Business Expense Tracking with Technology
Manual business expense tracking can be time-consuming and error-prone. Consider using cloud accounting software to streamline the process. These tools offer several benefits:
1. Automatic Tracking
Connect your business credit cards and bank accounts to automatically track expenses.
2. Receipt Capture
Use your mobile phone to photograph receipts, storing them securely in the cloud.
3. Easy Categorisation
Automatically categorise expenses and generate financial reports to prepare for tax time.
4. Billable Expenses
Mark expenses as billable and include them in invoices to ensure you get paid.
Implementing a business expense tracking system might take some effort initially, but it’s a crucial aspect of financial management. It helps you prepare for tax season, cut unnecessary costs, and improve cash flow.
We Can Help
At Cedar House Accounting, we understand the challenges small business owners face with business expense tracking. Our team can help you set up an efficient tracking system, ensuring you stay on top of your finances and focus on growing your business. Contact us today to learn more.
