As a business owner, don't you hate it when tax season comes around and you have to sort through and categorize your expenses? Sorting every receipt to reconcile the balance at end of every month is no fun. You don't remember what certain charges were for. Your employees have submitted reimbursements and you need to chase them down to get receipts. You're spending on salaries, equipment, insurance, software, travel, food, and a dozen other things you need to run your business.
It's easy to lose track of all these expenses. But you need to organize them for two reasons:
- Every responsible business owner should understand their costs and know how they're spending their capital.
- You can save money by claiming tax deductions on relevant expenses.
Getting your books in order is a nightmare. That's why every business needs an expense management solution to keep track of their crumpled receipts and effectively manage their expenditures. It can be as simple as a spreadsheet or as sophisticated as dedicated software attached to your cards. What's best for you depends on your volume of expenses and number of employees.
Here are some tips to mastering your expenses and getting your books under control:
Tip 1: Set up a Business Bank Account
If you are still using a personal account for business transactions, you need to change that. Keeping a business account sets you on the right path to monitor your business finances separately from your personal finances. Except for sole proprietors, all businesses must have a business bank account. This includes LLCs, partnerships, and corporations.
A business bank account will make tracking your business's cash, income, and expenditure easier since it's in a completely different account. Moreover, many business banking solutions have tooling for business expense tracking built in.
Here are the documents you'll need to open a business bank account:
- DBA Name
- Business license
- Employer Identification Number (EIN) and Social Security Number (SSN)
- Incorporation Certificate
Keep in mind that many business bank accounts come with fees you need to pay and account balance minimums. Make sure to shop around for options before picking one.
Tip 2: Track Your Receipts Digitally, Not on Paper
You're doing your books and you you realize your balance and expenses don't add up. Missing receipts are to blame. Storing physical receipts and sorting through them is time-consuming and error prone.
It's 2022. You don't need paper receipts. There are lots of apps that can help you track expenses without hassle. Expense tracking apps make note of every expense you incur. You just upload the snapshot of your receipt and it takes care of the rest. Most apps will let you upload even if you are offline.
One your expenses are tracked digitally, you can add up expenses, categorize them automatically based on rules, understand where you're spending money, and file taxes easily. Some apps will actually help you understand which expenses are tax deductible in real time.
Tip 3: Use a Business Credit or Charge Card
By issuing corporate or business cards to your employees and ensuring all transactions go through them, expense reporting becomes simpler. This way, your employees don't have to file for reimbursements or pick out expenses on behalf of your business from their personal spending.
Many corporate cards will give you analytics to understand expenses per employee, create spending limitations, issue and revoke cards as well.
The additional benefit is building business credit and earning points on your spending. Be careful though. If you're not careful about payments, you can be hit with fees and make it difficult for you to get financing in the future.
If you can't or don't want to get a credit card, look into charge cards. They don't have fixed spending limits and can prevent you from going into debt or facing unwanted fees with unpaid balance. Spending on a charge card still helps you build business credit.
Tip 4: Use Accounting Software
Using accounting software like Quickbooks or Xero can help you with bookkeeping when tax season comes around. They help you avoid common bookkeeping mistakes and cut down on work you would do with spreadsheets. You also can sync your accounting software to your business bank and card to automatically generate tax documents for you. Quickbooks can create a profit and loss statement for you in one click if all your expenses are properly categorized. Adopting software like Quickbooks will make your life and your accountant's life a lot easier while filing taxes and will make sure you're not inadvertently breaking any tax laws.
Tip 5: Set up Rules for Expense Categorization and Review Them Every Month
By defining categories of expenses, you can bucket your spending. Certain categories are tax deductible so being able to separate them out quickly is useful when claiming tax deductions. Categorizing every expense manually is time consuming. Lots of software will let you setup rules to auto-categorize future expenses accordingly. For example, every purchase from Amazon can be automatically classified as Office Supplies.
Some examples of common categories are:
- Organizational dues
- Office supplies
- Equipment
- Software
- Continuing education
- Health insurance premiums
- Professional services
ConclusionÂ
Managing expenses can be a chore for business owners. By following the above tips and incorporating expense management best practices with some simple tools, you can claw back precious hours, stay compliant, and save money with tax deductions and identifying unnecessary spending. A better understanding of your spending lets you run your business more efficiently and cut budget in areas that aren't creating value. Detailed financial reports will help you when you file taxes or look for financing.
If you're a general, trade or service contractor interested in managing your expenses better, reach out to us at Toolbox.
