What Is Expense Tracking and How Can It Help Your Business?
Expense tracking is an important part of creating a budget for your small business. Keeping a daily record of your expenses by tracking receipts, invoices and other outgoing expenses improves the financial health of your budget. Tracking expenses can help you stay on top of your cash flow and prepare you for tax season.
Here we will cover:
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
How Can Expense Tracking Benefit Your Business?
1) Tracking Your Expenses Makes You a Better Money Manager
A lack of cash flow can cause your business to fail.
As a business owner, staying on top of your monthly budget is crucial to your success. There is no better way to manage your budget and know where your money is going than expense tracking.
Recording your expenses daily can ensure that you are financially aware all year long and not just during tax season. Knowing where your money is going and how much you’re spending can improve your spending habits. Plus, you’ll have a better idea of where you can allocate money to positively impact your bottom line.
2) Expense Tracking Prepares You for Tax Season
Tax season is a stressful time for everyone, especially business owners.
Keeping a daily record of your expenses will help you avoid digging through shoeboxes, your car and pockets for receipts. Knowing what expenses are tax deductible can make sure you’re not losing out on any money.
Deductible expenses include:
- Business meals
- Telephone and internet expenses
- Travel expenses to attend client meetings
- Office supplies
- Bank fees and interest
- Home office expenses
- And a whole lot more. Find out what else you can claim on your taxes at Bench.co.
3) Give Your Employees Money Back with Expense Tracking
Small business employees spend money on travel expenses, meals and other purposes associated with business operations.
Having a best practice for expense tracking and reporting employee spending will help business owners efficiently reimburse their employees in a timely manner. Expense tracking gives you a better idea of your business’ operation costs. Plus, you’ll keep your team happy by reimbursing them their money.
4) Expense Tracking Makes Business Forecasting Easier
When you track your expenses, it is much easier to calculate the profitability of your business. The equation is simple: revenue minus expenses.
You can offer potential investors a better idea of your company’s profitability by offering them a better idea of how your business is doing. You don’t have to make an educated guess about your finances when you’re tracking your expenses. With up-to-date expense tracking, you can offer stakeholders a clear picture of your business forecast and strategy.
Elements of a Budget Process
The better you understand the elements of your budget, the better you can stay on top of your financial health. A budget helps you see where your money is going, makes it easier to target problem areas, helps you pivot when necessary and helps you reach your financial goals.
Let’s get started by understanding the basic elements of a financial budget.
1) Income Source
Where is your money coming from?
Knowing all your incoming revenue sources is a great first step in creating a successful business budget. Start with your sales figures and then factor in other sources of income that you are using to run your business.
2) Fixed Costs
What costs are you paying for every month?
Expense tracking in regular monthly costs like bills and subscription costs is often the easiest part of creating your business budget. These fixed costs are usually the same price every month and can be easily added to your operating plan.
3) Variable Expenses
What are some costs that you can adjust as you go?
Variable costs are items that don’t have a fixed monthly price. Often these purchases can be scaled up and down to work with your monthly operating budget. Depending on your profitability, you can scale up or down with these purchases as you see fit.
4) One-Time Purchases
Do you have the money for an unexpected purchase?
After you have factored in all your income sources and fixed and variable costs, you can see what you have available for one-time purchases.
Leaving the breathing room in your budget can help you enjoy perks like taking an educational course to improve your business knowledge or prepare you for unexpected costs like replacing equipment that might have broken down.
How Do You Track Finances?
As you know by now, tracking your business expenses is essential to the success of your business. Whether you’re preparing for tax season or trying to get a better idea of where your money is going, daily tracking is beneficial to your business. Here are a few steps to get you started on tracking your expenses.
1) Open a Bank Account
Keep your life simple by separating your business income and expenses from your personal finances. Muddling the two could be disastrous for the financial health of your business operations and complicate your personal finances too.
2) Consider a Cloud-Based Software
Cloud-based accounting software programs streamline your business’ finances and make it much easier to track your expenses. You can track your expenses from anywhere at any time with cloud-based software. Plus, it makes it much easier to manage your accounts receivable and payable, as well as payroll.
3) Save Your Receipts
Save time and ease your mind at tax season by keeping your receipts.
Using one credit card or debit card for your business-related purchases will help streamline your expensing tracking. There are also convenient features on accounting apps and software that let you take pictures of your receipts to store them on the cloud.
4) Know What’s Tax Deductible
When you have an idea of what’s deductible it is easier to know what type of expenses to attract. Consult with an accountant to get a complete list of tax-deductible business expenses.