Small Business Expense Tracking: Tips, Tools & Steps for Success
Managing a small business can feel more like a circus act than a job. You have responsibilities to juggle, hoops to jump through, and crowds of clients to entertain on a daily basis.
Understandably, you ringmasters have a lot of issues on your plate, and most likely your books are one of them. But accounting doesn’t have to be that complicated. Small business expense tracking is easier than you think!
Proper expense tracking guarantees your business has enough cash flow, ensures that your business stays compliant with IRS reporting, and helps bring down your tax bill. As such, it pays to get familiar with a few of the business expenses you’ll encounter:
- Accrued: Any expense that a business records on a balance sheet but doesn’t immediately pay – think utilities or salaries.
- Indirect: Expenses such as rent or supplies that don’t directly relate to delivering a product or service.
- Miscellaneous: Fees that don’t fall into any other category, often including legal costs, marketing, interest, and so on.
Choose Cash or Accrual Accounting
In your business’ early stages, you’ll need to choose between an accrual or cash basis for reporting. If you’re on the smaller side of the business spectrum, you’re probably using cash accounting—a simple one-to-one system where you record income and expenses as they come.
But in accrual accounting, you list these numbers on your balance sheet as they’re incurred. This can get complicated, but it offers a more accurate view of a business’ financial health in the long-term, and once your business reaches a certain point, you’ll inevitably need to switch. Keep this in mind as you grow—it’s perfectly fine to use cash basis early, but be ready to transition.
Know Where the Money Comes From
It’s common for small business owners to dip into their personal accounts when unexpected expenses pop up, so if you go down this route, make sure you keep personal and businesses expenses separate. You’ll eventually want to open a dedicated business credit card or other account for all company purchases, but feel free to use your own funds when necessary.
Regardless if you’re using a personal or business account, you will want to make sure to record everything. Take notes of every expense at the point of contact, and make sure to save those receipts. After all, if you’re planning on deducting these expenses to bring down your tax bill, you’ll need proof. Store all of these documents in a ledger, or better yet, use an accounting expense tracking software platform that lets you scan, upload, and categorize expenses as needed.
Learn What’s Deductible
So, what can business owners deduct? Per the IRS, there are a few guidelines to follow, though most of them are pretty straightforward.
“To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.”
While you’ll want to look over these rules in detail before filling out your taxes (or have your tax preparer do it), these are a few hard and fast guidelines for deductible expenses:
- Employee pay
- Taxes paid to federal, state, or local jurisdictions
- Vehicle mileage used for business purposes outside of commuting
- Business insurance
- Retirement plans for you or your employees
- Building rent (with some qualifications)
- Expenses that are used for both business and personal uses may be deductible, but only for the sum used for business purposes
- Leverage accounting software to your advantage
Armed with your business expenses and an idea of which fees are tax-deductible, you’ll start to get a sense of how the numbers shake out. From here, you should take things to the next level (if you haven’t already) by logging everything in an accounting software platform.
You’ve probably been doing this already in spreadsheets, but a dedicated platform like QuickBooks or Xero can really help pull things together. These tools offer some great features in expense tracking software, from custom templates to automatic reporting to other accounting integrations, such as payroll.
Use these tools to corral your expense reports and keep everything together. Having all of this data in one place will pay dividends when it comes time to fill out taxes, generate quarterly reports, or perform any other functions related to your business accounting.
Consider Outsourcing Expense Tracking
If you’re looking for an even more hands-off approach, consider bringing on an outsourced bookkeeper who can help you with your books. The right provider will be able to prepare your taxes for you in the same way a certified accountant could, and their experience with accounting software will help you understand the best way to manage your books across the year.
Learn how to develop a clear picture of the financial state of your business in our free guide below.