Although most people know they should track of their business expenses, many individuals and small businesses do not. The variety of bookkeeping options can be overwhelming and in the beginning tracking expenses may not seem essential, however the data it yields is among the most important success indicators when it comes to both business and personal finance.
Why Track Expenses?
It’s easy to get so wrapped up in day to day operations, such as product creation, sales and marketing efforts, that accounting gets put on the back burner. But not keeping up with your books from the start creates a backlog of work that will make things more difficult on you in the future. There are countless reasons to track expenses, and here are a few of the big ones:
- Identify major expenditures and areas to cut back
- Tax benefit purposes
- Track the business’ financial health
- Avoid unnecessary debt
- Make informed decisions, financial and otherwise
- Save for future investments
How to Start Tracking Expenses
The bookkeeping method you settle on has to be something that works for you. The size or your business and type of business entity you have may also lead to one method working better for you than another. Try a few programs out, and see what best fits your business and style. Some business owners prefer to write out expenses longhand, while others find it more convenient to track everything online or with a software program.
Regardless of which method you choose, set aside a time at least once per month to update your books. Accountants often recommend you tackle this task at the end of each month. Pick a day and stick to it. After all, you will be more likely to follow through if you establish a routine. In addition, review your bookkeeping method on an annual basis. Determine if your needs are still being met by your current program. As your business grows and changes, so might your accounting needs. Here are few options to consider:
- Excel spreadsheet
- Accounting software
- Hiring a bookkeeper or accountant (either third party or in-house)
- Smartphone app
It’s also important to keep and file away your receipts for tax purposes for six years in the case you should be audited by the IRS. As your business grows your expenses will fall under many categories, however, five common types of receipts you should save include:
- Meals and entertainment
- Out of town business travel
- Vehicle related expenses
- Receipts for gifts
- Home office receipts
Additionally, be sure to keep your business and personal expenses separate for tax purposes.
Knowing exactly what products and labor are costing the business will help you stay on the right track to continued profitability. Compare expenses to your monthly sales report to see where you need to cut back and where you can afford to dedicate more resources. Use bookkeeping data to identify and make changes if necessary to products that require more labor or time than raw materials. Review the cost versus price and adjust accordingly.
Viewing your expenses as part of the bigger picture of your overall finances will provide a helpful perspective on your business. Not only will tracking expenses give you a clear picture of the financial health of your business today, it will also help you plan for future expenses, investments and save money along the way.