As a business proprietor, keeping track of your company’s expenses is essential for monitoring your financial flow. It helps you determine whether your business expenses and savings are in balance.
Monitoring business expenses can take time and effort. Many entrepreneurs actively dislike the time tracking business expenses takes away from the practical side of business management.
Once you have established a reliable system for monitoring business expenses, you will realize that expense tracking is one of the accounting pillars supporting the success of your small business.
Why should I record my expenditures?
Recognizing our spending patterns is the most effective method for managing our finances. When you know how much money you allocate, it is simple to balance your income and expenses and even preserve for the future.
If you manage a budget (daily, monthly, or even annual), tracking your spending is the best method to ensure that your spending stays within the budget. When you monitor your expenditures, you know where your money goes and can ensure it is used prudently.
Keeping track of your expenditures also lets you comprehend why and how you got into debt. This will then assist you in developing an appropriate strategy for escaping debt.
Keeping track of your monthly expenses holds you responsible for your finances in several critical ways.
1.It assists you in adhering to your budget.
After establishing a budget and a monthly spending plan that considers your income and expenses, daily expense monitoring is essential to ensuring that you stick to your budget.1 If you do not track your finances, you will not know when to cease spending in a particular category (such as food or clothing).
After each month, compare your actual spending to your budgeted spending by analyzing your tracked expenses. If you have overspent, seek methods to reduce spending in a specific category. If you have underspent, you can increase your savings and debt repayment. In either case, you’ll want to use what you’ve learned from tracking expenses and any life changes (such as a wedding or the birth of a child) to adjust the budget for the following month, which places you on a firmer financial footing.2
For instance, tracking your expenses may disclose that you budgeted too little for food or forgot to budget for one-time costs such as holiday gifts. In this case, you can include these infrequent expenses and create a more realistic, thorough budget for the following month.
Maintaining a spending record might help you identify overspending problems.
2.Keep a record of your monthly spending to understand your spending habits better.
If you keep track of your monthly spending, you can find that you are paying for a service (such as a gym membership) that you do not use but must pay for. Alternatively, you may discover that your passion for eating out and purchasing expensive clothing causes you to be bankrupt before the end of the month.
Tracking your expenditures can also help you discover significant money management issues. As you evaluate your expenses over months or even years, you may find, for instance, that your rent consumes a disproportionate amount of your monthly income or that you need to earn more to live the lifestyle you envisioned. To resolve such issues, you may need to make more significant lifestyle adjustments, such as relocating to a less expensive residence or obtaining a second job.
3.It helps you achieve your financial goals.
Adhering to your budget is only sufficient if you make significant savings-related progress. Whether your goal is to build an emergency fund, pay down debt, save for retirement, or save for college, a vacation, or other short-term goals, you are more prone to achieve these objectives by creating a savings plan for them if your budget for them and track your spending to ensure that it aligns with your priorities.
If decreasing high-interest debt is your primary financial priority, you should budget for it as if it were a regular expense. Contribute the monthly budgeted amount to this debt, then monitor your expenditures to ensure you have paid off as much debt as intended
Once you’ve paid off your debt, you can pursue other objectives you couldn’t finance while in debt, such as retirement investing.
Methods for Monitoring Small Business Expenses
To effectively monitor and manage expenses, leaders of small businesses should take the following steps:
4.Create a corporate checking account.
According to Federal Reserve research, over 60% of enterprises with excellent financial health established a payroll budget and a separate bank account. In contrast, fewer than 5% of businesses with poor financial health completed these two fundamental procedures.
Keeping your business funds apart from your funds makes monitoring your expenditures easier and filing for tax deductions easier.
The SBA notes that business bank accounts protect against personal liability by separating business and private funds.
Businesses should open checking, savings, credit card, and merchant services accounts. This permits the industry to take credit and debit card payments from customers. The company will need its federal employer identification number (EIN) to establish a business bank account. A sole proprietor is permitted to use their social security number.
Use a business-specific credit card. A company can establish a credit history with a dedicated business credit card to obtain financing (and ideal financing terms) when required. Credit also enables the organization to make substantial early purchases.
It’s no surprise that a measure of financial health is one’s access to credit. l health; according to a Federal Reserve study, 65% of businesses in poor financial health reported having no credit on their credit cards, while 87% and 95% of companies in above-average and excellent economic health, respectively, had credit available. According to the SBA, credit cards help businesses negotiate favourable agreements with suppliers and protect them from identity theft. Credit cards also benefit companies, such as business and travel rewards.
Choose between cash and accrual accounting. Every small business must choose a set of principles for determining the timing of income and expense reporting. This provides a uniform method of accounting for tax purposes. Accounting on either an accrual or cash basis is now permitted for businesses with yearly revenues of $25 million or less over the prior three tax years (the previous maximum was $5 million).
As accrual accounting is the recognized accounting procedure under generally accepted accounting principles (GAAP), accrual accounting is required for financial reporting by most private companies, with limited exceptions.
Cash basis accounting is a more uncomplicated and manageable method for small businesses because transactions are recorded when payment is received. The year in which expenses are paid is the tax year in which they are deducted. Regardless of when the price is made, the transaction is recorded in the books once the sale is finalized, and the business can delete it in the tax year in which it was paid. Accrual accounting necessitates double-entry bookkeeping and provides a more accurate and comprehensive financial picture because it takes a long-term perspective on the business.
Select accounting software to automate record-keeping and monitor expenses in a centralized location. Fifty-eight percent of U.S. respondents to a survey by Robert Half reported that their organizations now use cloud-based accounting and finance solutions exclusively or in part. These solutions simplify the monitoring, organization, and payment of expenses, such as supplier invoices, rent payments, and payroll. They can reduce the effort required to monitor the costs and improve the precision of this data. In addition, accounting software includes reporting tools that can disclose the amount of money spent on each category or provide comparisons between years.
5. Utilize a receipt scanner to digitize receipts. Specific accounting software includes or supports mobile applications that enable employees or business proprietors to scan tickets using their smartphone’s camera. Each utilizes OCR technology, which converts text to machine-readable code. Purchasing a separate receipt scanner enables organizations to review a document, examine it, and categorize it automatically or manually by mapping its contents to specified fields in the accounting software. It costs as little as $100; desktop receipt scanners are a worthwhile investment for businesses’ expense and document administration and are compatible with most accounting software.
Tracking business expenses is a crucial first step in acquiring the data required for improved long-term choices that will benefit employees, customers, and the economy as a whole.
