How do you track your small business expenses? It may not be top of the to-do list, but regularly checking in with your expenses can really pay off over time. Here’s why you should invest some time and effort into your small business expense tracking.
Reason 1: You’ll improve your cash flow.
Businesses of any size should be aware of every single penny that flows in and out of their accounts. Managing cash flow ensures there’s enough money on hand to pay the bills, avoid late fees, and cover the cost of expansion. Otherwise, you run the risk of finding that your income hasn’t been sufficient to outweigh expenses. Breaking down outgoings into a list of monthly expenses for small businesses highlights any areas for improvement, all of which is important when creating a realistic budget.
Armed with a small business expense report, you’ll be better able to stick to your budget, fixing bad habits and making better choices. This adds up to a more favorable cash flow statement and better money management overall.
Reason 2: You’ll maximize your tax returns.
While none of us look forward to tax season, you can make it a more positive experience if you have a solid grip of your expenses throughout the year. Keeping every receipt and tracking every petty expense ultimately gives you the chance to maximize tax credits.
Put a small business expense tracking system in place and you could be reimbursed by the IRS for numerous everyday expenses. Examples of tax-deductible items include things like:
Cell phone data costs
Office rental and utilities
However, you won’t be able to itemize these deductions on your tax return without careful record keeping throughout the year. Break daily purchases down into expense categories for small businesses and review them regularly.
Reason 3: You’ll attract investment.
Tracking sales, revenue, and profit all helps your business grow and entices investors. When you’re making money, you’ll attract further investment and boost credibility in the eyes of lenders. How do expenses factor into this equation? To calculate profit, you’ll need to subtract expenses from revenue. If you don’t have accurate records of your expenses, you’ll be unable to use this formula. You’ll also have difficulty preparing your all-important financial statements, which any investor will ask to see.
Taking the time to not only track, but regularly review, your expenses ensures that your profit and loss statements are more than just a guess.
How to track expenses more efficiently
Now that we’ve covered all the reasons why you should review and track your expenses, here’s how to get started.
Review the competition: Before you draw up a budget, you should be aware of what average expenses look like for competitors. You can’t know if your expenses are out of line if you have no baseline figure for comparison. View financial statements for businesses in the same industry, paying careful attention to the small business expense report.
Categorize your expenses: It’s a good idea to create a spreadsheet with separate expense categories for small businesses. Examples include rent, taxes, raw materials, and marketing costs. When you’re reviewing your outgoings, this helps you figure out if there’s one area where more money is allocated than necessary.
Break down expenses: You need to not only look at the big picture in your annual report, but also use a list of monthly expenses for small businesses, as well as daily lists. When the time comes to cut costs, this helps you see where you’re spending as part of a daily, monthly, and yearly cycle.
It does take a bit of time and effort, but small business expense tracking is a crucial component of financial management. It helps you prepare for tax season, cut unnecessary costs, and improve cash flow.
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