Can you quickly get your hands on your small business expenses? Some small business owners still use the “shoebox accounting” method of throwing everything into a drawer and sorting it out later. In today’s high-tech world, there’s no excuse for that chaotic method.
When you set up an organized system to track business expenses, it will be easier to build financial reports and measure business growth. Additionally, you’ll simplify tax time.
Here are steps you can take to put an expense tracking system in place.
1. Keep personal and business expenses separate
It’s a financial mistake to use a personal checking account for your business expenses. You need to have business expenses separate from personal when it’s time to file your taxes.
Additionally, if you’re facing an IRS audit, combined expenses can create a logistical nightmare. To avoid headaches, open a business checking account.
A big benefit of using a business checking account is to build strong business credit. A high business credit score represents how trustworthy your business is. Lenders use this number to help decide whether to give your business a loan, line of credit, or credit card.
The stronger your score, the better your rates. For more information, check out this article from the SmartBiz Small Business Blog: Do You Know Your SBSS FICO Business Credit Score? You’ll learn how your score is calculated, why a strong score is important and how to strengthen yours.
2. Choose the cash method or accrual method
The Bench blog explains the difference between these two accounting methods:
The difference between cash and accrual accounting lies in the timing of when sales and purchases are recorded in your accounts. Cash accounting recognizes revenue and expenses only when money changes hands, but accrual accounting recognizes revenue when it’s earned, and expenses when they’re billed (but not paid).
According to the Quickbooks blog, many small business owners choose the cash method of accounting because it’s a simplified bookkeeping process. It’s easy to track money as it moves in and out of your bank account because there’s no need to record receivables or payables.
Read more about cash versus accrual here.
3. Save and scan receipts
A receipt scanner and tracker save time and effort. According to the Balance Small Business Blog, the best receipt scanners can be used on the go and automatically extract important information like the date, merchant, amount spent, and payment method.
If you’re looking for a scanner to keep tabs on your receipts, review this post for some of the best: The 8 Best Receipt Scanners and Trackers of 2019.
4. Be aware of tax-deductible expenses
According to the IRS, 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. An expense does not have to be indispensable to be considered necessary.
Review this article from the IRS: Deducting Business Expenses. You’ll learn what you can deduct, personal vs business expenses, business uses of your home and car, and more.
Tracking expenses may sound complex but it's easy once you get a system in place. You'll save time, giving you more opportunity to work on growing your business. It's a win-win!