A business has two kinds of expenses: actual and expected. Actual expenses are the ones that are directly tied to a particular business transaction, project, or even day.
In contrast, expected expenses are more long-term. The things you know will come up eventually, like monthly rent or utility bills, subscriptions or membership dues, and other routine costs.
These types of expenses also have different implications on your business’s financial health. While unexpected expenses can disrupt your cash flow and budget, anticipated costs are opportunities to plan for the future and manage risk exposure in case something changes unexpectedly.
From keeping track of your receipts to tracking business mileage for tax purposes, there are many ways you can stay on top of your business expense tracking efforts.
Why Should You Track Business Expenses?
There are several reasons why you should track business expenses. While the benefits of tracking expenses depend on the industry and company type, they usually include:
- Building financial awareness
- Staying accountable
- Planning for the future
- Improving efficiency
Financial awareness is key to any successful business venture. You may struggle to make well-informed decisions without a basic understanding of how money moves through your business.
Tracking your expenses is the first step toward developing financial awareness. If you know how much money you spend on advertising, you can make better decisions about the type of advertising you use and how much you spend.
Staying accountable to your business partners and investors is crucial to the success of any company. You may find it difficult to secure funding or maintain relationships with important partners without accurate financial information.
Tracking your expenses can help you stay accountable by providing hard numbers to support any financial claims you make. Planning for future expenses is essential for long-term business success.
It is challenging to forecast business expenses without some basic knowledge of your spending habits. Tracking your expenses can help you anticipate future costs and plan them appropriately.
It may also help you identify areas of potential cost savings. Improving efficiency is another crucial benefit of expense tracking. More efficient businesses are generally more profitable.
Efficiency is often tied to the amount of time it takes to complete a task. Tracking expenses can help you identify ways to save time by streamlining your spending process. And identifying areas where you can eliminate waste.
Benefits of Tracking Business Expenses
There are several benefits of tracking your business expenses that you might not have been aware of. Here are some details about what you stand to gain by paying a bit more attention to finance expenses.
Financial awareness: Tracking your expenses provides you with a basic understanding of how money moves through your business. This can help you make better decisions about spending and investing your company’s money.
Accountability: Staying accountable to your business partners and investors means having accurate financial information to support your claims. Tracking your expenses can help you stay accurate and support your claims with hard numbers.
Planning for future expenses: Planning for future business expenses is essential to long-term business success. It is challenging to forecast expenses without tracking your spending habits.
Improving efficiency: Tracking your business expenses can help you identify areas where you can save time and money. This can help you boost your company’s efficiency and profitability.
Tax deductions: If you’re tracking business expenses for tax purposes, you may be able to deduct some of those expenses from your taxable income. This can help reduce the amount of money you owe the government each year.
Better cash flow: Organizing your business expenses can help you anticipate short-term cash flow issues. This can help you plan for and avoid cash flow problems that could disrupt your business.
Tracking Expected Business Expenses
The first place you can start tracking your business expenses is with expected expenses. These are the items that come up regularly, often monthly. They’re usually fixed costs and include:
- Utility bills
- Subscriptions and memberships
- Rent and other fixed rental costs
- Insurance payments
- Other recurring costs
You can track these expenses using a spreadsheet and tagging each entry with the date it was due and the amount due. You may also want to track the name of the company or person you’re paying if you have a lot of recurring payments coming from the same place.
If you have a lot of expected expenses, you may want to consider sorting them into categories to track them more easily. Expenses like insurance payments and subscriptions are generally better tracked per month or year.
These are best tracked monthly, so you don’t lose track of how much you owe or when it’s due. Expenses like utility bills and rent are better tracked per transaction.
This way, you can see exactly how much you’re spending on each of these expenses and when the payment is due.
Types of Business Expenses
With any business, one thing is accurate, and it’s that the expenses you have daily will differ from others. Before using an expense tracking system, you need to understand the different expenses you’ll be tasked with.
It also helps to understand them so the person managing your business bank account can be on the lookout for anything out of the ordinary.
Business Travel Expenses
If you have to travel for work, you can claim business travel expenses. Your employer will likely reimburse you for these expenses if you’re an employee.
If you’re self-employed, you might be able to deduct these expenses from your taxable income. You can deduct fuel costs and tires if you drive to your business destination.
You can also deduct parking fees and bridge tolls. If you travel by air, train, or bus, you can deduct your transportation costs, including airline baggage fees, public transportation fees, and taxi rides.
You can also deduct meals and lodging expenses if you have to stay overnight for work. You can deduct your travel expenses if you’re visiting a client or business partner.
However, if you have to travel to a conference or seminar to advance your business, you can deduct these travel costs.
Equipment And Software
If you purchase equipment or software to use for your business, you can deduct these costs from your taxable income. For example, you can deduct these expenses if you need to purchase computer hardware or software to run your business.
You can also deduct the cost of renting equipment or software if you plan to use it for less than one year. If you purchase computer software, you can also deduct the cost of maintaining the software.
Many business owners fail to realize that maintenance costs are a valid tax deduction. You can deduct these costs if you purchase office furniture or a computer for your home office.
However, you may only deduct the portion that relates to your business. For example, if you purchase a $5,000 computer for your home office, you can deduct $1,000 if you use the computer for your business.
Most small businesses advertise to gain new customers. You can deduct these costs from your taxable income if you spend money on advertising. While you may think that advertising is a one-time cost, tracking these expenses is essential.
If you don’t, you may end up suffering tax consequences. The IRS allows you to deduct advertising expenses that occur throughout the year. Most businesses track advertising expenses in a media log.
A media log is a spreadsheet that includes information about each ad you run. You can even use your computer to record this information. If you use social media to advertise, you can deduct the cost of maintaining your accounts.
However, you can only deduct the amount that exceeds the median cost for running a social media account.
Marketing Collateral And Events
The IRS considers marketing collateral, such as brochures and advertisements, as a depreciating asset. This means that you can only deduct the amount over the years when you purchase these items.
If you buy a piece of marketing collateral for $1,000, you can deduct $250 yearly until the cost is fully deducted. If you create advertisements for clients, you can deduct the cost of creating the ads.
You can deduct travel expenses if you attend industry conferences or seminars. If you attend marketing events, you can also deduct the fees associated with attending the event.
You can deduct these costs if you purchase office supplies for your business. These include paper, pencils, toner, and other items you need to operate your business. You can only deduct the amount that exceeds the average amount that other businesses spend on office supplies.
This means that if the average amount that other businesses spend on paper is $500 per year, you can only deduct $500 in paper expenses. You can deduct the cost if you purchase a computer or software for your business.
You must make sure to note the model and keep all receipts for these purchases. You can also deduct the cost of maintaining your computer and software.
Repairs And Maintenance
If your business purchases items that wear out or require maintenance, you can deduct these expenses from your taxable income. For example, you can deduct the cost if you need to repair your vehicles or equipment.
If you purchase tools that break or need to be replaced frequently, you can also deduct the cost of these items. You can deduct these expenses if you hire contractors to repair or maintain your equipment.
However, you must keep accurate records to prove these expenses for your taxes.
Hiring a Business Expenses Managers: All The Advantages
If you own a small business and you’re on a budget, you might not be able to hire someone to manage your expenses. However, if it’s money that could be reinvested back into your company, keeping track of your business expenses is worth the hassle.
Business owners can reduce their tax liability by keeping track of all their business-related costs. These write-offs can directly decrease the amount of taxes you owe the government.
Hiring someone to manage your expenses might seem like an unnecessary expense, but it could save you a lot of money in the long run. Here are some benefits of hiring someone to manage your business expenses:
Save Money On Taxes
Depending on your business type, there may be many expenses that could directly decrease your tax liability. For example, if you own a clothing store, you could claim the cost of buying clothes and shoes for your employees as an expense.
If you own an accounting firm, you could deduct the costs of supplies, such as paper and pens, or the monthly payments on your computer and printer. If you own any type of business, you can reduce your tax liability by keeping track of your business expenses.
Depending on your business and the type of expenses you incur, you could save thousands of dollars in taxes.
Improves Company Finance Records
You’re building your company’s financial record while keeping track of all your business expenses. This keeps you honest with yourself, your employees, and the government. It keeps you from claiming things you don’t deserve. It also helps you develop a better understanding of the value of the work your company does.
For example, if you’re the owner of a design firm, you could keep track of the supplies you use. You could also keep track of the amount of time your employees spend on each project. You could also keep track of the cost of any projects you’re paid for.
All these things could help you accurately determine the value of your work.
Ensures Employees Are Paid Correctly
If you’re paying someone who works for you, you’re required by law to pay them correctly and on time. If you don’t, you could face significant consequences, including a bad reputation, a lawsuit, and even jail time.
However, if you keep track of all your business expenses, you could show the government that you’re meeting your employment obligations. For example, if you own a construction company, you could keep track of the cost of all the equipment your employees use.
You could also keep track of the cost of supplying your employees with food and water while they’re on the job. If you own an accounting firm, you could keep track of the cost of office supplies and computers.
These types of business expenses could help you meet your obligations to your employees.
Increase Smart Business Decision Making
When you’re keeping track of all your business expenses, it’s easy to become a better business owner. You can track how much you spend on certain things and how much time you spend on specific projects.
You can also keep track of the amount of money you’ve paid your employees. This can help you make smart and informed business decisions. If you own a construction company, for example, you could keep track of the amount of money you spend on equipment and the amount of money you spend on materials.
You could also keep track of the time your employees spend on each project. If you own an accounting firm, you could keep track of the amount of time your employees spend on each project and the amount of money they spend on office supplies.
Completely Worth It
Hiring someone to manage your business expenses is not easy, but it’s well worth it once you find the right person. You want to find someone who’s honest and trustworthy. Someone who’s honest and trustworthy will keep track of all their expenses and report them to you accurately.
This will allow you to keep track of your business expenses, and it will help you meet your tax obligations. Remember that many people who work for themselves manage their expenses incorrectly. This can put a damper on your financial records.
You want to find someone who understands how to keep track of their business-related expenses. This will help you ensure your financial records are accurate and will help you save money in taxes.
Business Tracking Pitfalls to Avoid
If you want to be successful with business tracking there are some mistakes you need to avoid.
By avoiding these you can improve and increase future business expense tracking for your business.
Not Correctly Tracking Mileage
One of the most common mistakes owners make when tracking business expenses is incorrectly tracking mileage and travel expenses. Business owners need proof of the distance traveled, whom they traveled with, what they drove, and the amount spent on gas.
These rules apply to company and personal trips. The IRS does allow you to deduct the cost of personal travel as a business expense. However, you must prove the business reason for that travel.
The IRS allows you to use the standard mileage rate for business trips. The IRS sets this rate each month, and it’s usually less than the amount you’d be able to deduct if you were to track your mileage by how many miles you drove.
The standard mileage rate is based on the average cost per mile to operate a vehicle. It considers your average annual miles driven and the cost of gasoline.
Mixing Personal and Business Expenses
Another common mistake owners make when tracking business expenses is mixing personal and business expenses. If you’re deducting an expense as a business expense, there’s no reason to do it as a personal expense.
The IRS doesn’t know the difference between personal and business expenses. The only thing they care about is the amount of your deduction. You can only deduct the amount by which your expense exceeds your income.
If you’re mixing personal and business expenses, you could be overstating your deductions for both You should have a business account used for business expenses only.
Forgetting to Document Everything
It’s easy to forget to document business expenses that don’t fit neatly into an IRS category. For example, you may have a business trip that includes a sales call, two meals with clients, and a cab ride to the hotel.
Many owners would forget to document that fifth item, the cab ride. That mistake would come back to haunt them if they were audited. The best way to avoid this is to keep a log of all your business expenses.
It’s better to have too much documentation than not enough.
Getting Confused with Depreciation
An incorrect deduction is the next trap many owners fall into. Many business owners deduct the value of their equipment as the expense for that year. While that might seem logical, it’s incorrect.
Owners should depreciate the value of their equipment over time. They do this by taking the value of their equipment and dividing it by its expected useful life.
That expected useful life varies based on the type of equipment. For example, lawn mowers have an expected lifespan of seven years. A car would have an expected lifespan of five years. You then deduct this amount from your gross income each year.
A Business Expense Tracking Guide
The key takeaway is that most businesses can benefit from tracking expenses. Knowing how much money you’re spending on different things is essential.
It can be used to make better decisions about how to spend money and invest in your business. It’s also important to track expenses to plan for the future and keep your company on track.
If you track your expenses, you’ll also have the added benefit of being able to claim tax deductions for certain types of expenses. Need help with business expense tracking?
Schedule a free consultation with Bennett Financials now.