The first step to doing so is separating your business expenses from your personal expenses. This will help you understand how much you’re spending as a small business owner. Thus managing your expenses will increase profitability.
Many small business owners track their business expenses using Microsoft Excel. However, this method increases the chance of human error as your business grows, can be difficult to keep organized.
What are business expenses?
Business expenses are those expenditures that relate directly to starting and maintaining your business. They include expenses like inventory purchases, wages, and salaries, etc.
There are two types of business expenses: cost of goods sold, which are costs associated with making your product; and operating expenses, which include rent, salaries, business licenses, and permits, and self-employment.
Businesses need to track and classify their expenditures because some expenses can count as tax reductions, resulting in important cost savings. This means you’ll pay less at tax. It will demonstrate to lenders that your business is fiscally responsible and can be a trusted borrower when you need financing.
Follow the points to track business expeses:
1. Open a business bank account
As a new business owner, you will need to open a business bank account. There may be an instance when you use your bank account for business purposes, having a separate business account will make it much easier to track and record your expenses properly.
You’ll need to open:
· A business chequing account
· A business savings account
· A business credit card
2. Choose an appropriate accounting system
You have a choice about what kind of accounting system to use for your business. While the best option is to choose an accounting software application that will work for your business, you can also use spreadsheet software, such as Microsoft Excel to record income and expenses for your business.
3. Managing Receipts Properly
Here are some strategies to keep paper receipts organized:
· Keep a separate envelope in your purse or bag for business paper receipts.
· Use file folders. At the beginning of the year, make one for each month and file your receipts accordingly.
· Use binders. Buy plastic sleeves and label them by month or category.
You can store receipts digitaly, many apps are available to make it easier to store receipts digitally.
4. Make a Spreadsheet
If you’re just starting a business this option works if you prefer a low-tech approach to track your expenses. As your business grows you’ll want to use a more sophisticated tracking method.
Spreadsheets are also easy to import into your accounting software to batch add expenses. Make a spreadsheet in Excel or Google with the following columns:
Consider using the following categories:
- Client meals
- Home office or office rent/mortgage and utilities
- Travel expenses
- Office supplies
5. Select an accounting method
The cash-basis method is the simplest accounting method for small business owners. With the cash method, you record income when you receive it and expenses when you make payment.
The accrual basis is more complex than the cash-basis method and uses additional accounting categories. In accrual accounting, you record income and expenses when you incur them, regardless of when you receive money or pay.
Consider the size of your business when selecting your accounting method.
6. Use software to track and analyze business purchases.
Most accounting software programs create expense categories. It will help reduce the time you spend preparing your tax returns.Many budget tracking tools can also help you calculate monthly expenses, track personal capital, and even sync with your credit or debit card.