Running a business is a whirlwind. Between juggling clients, projects, and deadlines, expense tracking can easily fall by the wayside. But come tax season, the scramble for receipts and reports creates chaos.
Manually entering data takes up valuable time for both employees and finance teams. It can even hurt your bottom line.
This article is your one-stop guide to streamlining small business expense tracking. Let's ditch the stress and dive into a system that saves you time and money.
What are Business Expenses?
According to the IRS, business expenses are ordinary and necessary costs you need to keep your business going. Every business, from small shops to big corporations, does this throughout the year.
Why? Because come tax time, it'll be handy.
Here are some examples: salaries you pay your staff, rent for your workspace, insurance to protect your business, gas for company vehicles, stuff you need for the office like pens and paper, and commissions earned by your sales team.
Some expenses like rent or insurance typically stay the same each month, making them fixed costs.
On the other hand, expenses like sales commissions, gas for deliveries, and shipping can change depending on your business activities, making them variable. This means they're expected costs, but the amount can increase or decrease based on your business needs.
Key Takeaways
- The IRS considers business expenses to be ordinary and necessary costs for operating your business.
- These expenses can be either fixed, meaning they stay fixed, or variable, meaning they can change based on your activity.
Why Should You Track Business Expenses?
Tracking expenses regularly gives you insight into the most up-to-date financial data. Using this, you can analyze your company’s success, identify weaknesses, and plan strategically.
What’s more?
- You don’t have to be buried in a pile of paper receipts.
- You don’t miss any tax deductibles.
- You don’t get into trouble with tax authorities.
- You can stay on top of spending and grow your business.
We won’t lie; small business expense tracking is as boring and time-consuming as it sounds. But we aim to simplify it for you by:
- Minimizing the time you spend on this task.
- Maximizing the value you derive from it.
What Business Expenses Should I Track?
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When it comes to small business expense tracking, the key is to be comprehensive. Here’s a breakdown of essential business expenses you should monitor to maintain a healthy grip on your operations:
Fixed Costs
These are predictable expenses that stay relatively consistent each month. Tracking them helps with budgeting and forecasting. Examples include:
- Rent & Utilities: Lease payments for your office space, along with utility bills for electricity, water, and internet.
- Salaries & Benefits: Payroll for your employees, including wages, commissions, bonuses, and employer-provided benefits like health insurance.
- Loan Payments: Regular instalments towards any business loans you may have.
- Insurance Premiums: Costs associated with various insurance policies like property, liability, and worker's compensation.
Variable Costs
These expenses fluctuate based on your business activity. Monitoring them helps identify trends and optimize spending. Examples include:
- Inventory & Supplies: The cost of raw materials, finished goods, and office supplies you purchase.
- Marketing & Advertising: Expenses related to marketing campaigns, promotional materials, and online advertising.
- Travel & Entertainment: Costs incurred for business trips, meals with clients, or attending industry events.
- Professional Services: Fees paid to consultants, lawyers, accountants, or other professional service providers.
- Shipping & Delivery: Costs associated with shipping products to customers or delivering services.
Additional Expenses
- Technology & Software: Subscriptions to software programs, website maintenance costs, and any technology-related equipment purchases.
- Merchant Fees: Fees associated with credit card processing or other payment gateways.
- Taxes: Estimated or actual tax payments made throughout the year.
Remember: It's also important to track any miscellaneous expenses that don't necessarily fit into the categories above.
Also Read:
What Are Tax-Deductible Business Expenses?
A tax-deductible business expense is any cost you can subtract from your taxable income, lowering the taxes you owe. These expenses must be considered "ordinary, necessary, and reasonable" for your industry.
Ordinary: Imagine attending a trade show. If that's a common practice in your field, then the expense qualifies as ordinary.
Necessary: This doesn't mean the expense is absolutely vital for your business to function. Think of it as an expense that's helpful and contributes to your operations. Buying office supplies is a good example.
Here are some common examples of tax-deductible business expenses:
- Employee Payroll: The salaries and wages you pay to your employees.
- Rent or Lease Payments: The cost of your office space or other business premises.
- Utilities: Electricity, water, and internet.
- Spreading Out the Cost: Depreciation on assets like equipment and vehicles (gradually deducting their value over time).
- Financing Your Operations: Interest paid on business loans.
- Fees & Permits: Taxes and licenses required to run your business.
Remember: The deductibility of expenses can vary depending on your industry. For more information go through IRS Publication 535, which dives deeper into business expense deductions and general tax filing rules.
Also Read:
How to Keep Track Of Your Business Expenses?
As a small business owner, you might not love the billable hours you and your employees spend on keeping accurate records of spends. You have bigger fish to fry, right?
Thus, we’ve curated a list of effective tips that might help make business finances easier to track:
Open A Business Bank Account
Using the same bank account for business and personal expenses might be working just fine for you, but it might not be the best move for your business. What happens when you can’t remember if you spent that $36 on a business lunch or on a leisure brunch with your friend?
Having a business bank account helps separate your business expenses from personal expenses. It also ensures you will not run into trouble with the IRS for fraudulent or misrepresented expenses.
Here are some other benefits of opening a business bank account:
- Limited liability: Business accounts come with limited personal liability as your business and personal funds are kept separate.
- Security: Merchant services generally offer purchase protection to secure your customer’s details.
- Professionalism: Customers can pay with credit cards or make out cheques to your business instead of your personal account.
- Work delegation: You can safely have your employees handle day-to-day banking activities on your behalf.
- Line of credit: Business banking offers a line of credit that can be used in the event of an emergency or to make important business purchases.
- Increased purchasing power: Business accounts help establish a credible credit history, enabling you to make larger purchases for your business.
Once you’ve segregated your personal and business expenses, understanding spending v/s income is a no-brainer.
Track Your Receipts Regularly
Here are a few reasons why tracking receipts is of grave importance:
- They are needed as evidence for business purchases if you ever get audited.
- They help better manage cash flow, which is very crucial for businesses.
- They ensure business expenses don’t outstrip your income.
Whether you keep your receipts neatly organized in a file or dump them in your car’s dashboard, you must keep them safe. However, your accountant would be grateful if you had a better system in place.
An upgrade from the car dashboard would be an Excel spreadsheet (all businesses love spreadsheets.) But this means manual data entry, and guess who doesn’t love it? Yes, your accountant. (Your employees don’t like it either.)
Migrating to an expense management software can prove to be an investment that’ll pay for itself. It helps streamline the receipt management process, saves time and effort, decreases the chances of errors, and increases financial productivity.
In other words, you won’t have to spend another second worrying about tracking business expenses!
Do I need Physical Copies of Receipts as Proof of Purchase for Taxes?
No, you don't necessarily need physical copies of receipts as proof of purchase for taxes. The IRS prioritizes having documented proof of your expenses, and there are several ways to achieve this:
- Digital Receipts: Many stores and service providers offer digital receipts via email or through their apps. These digital copies are perfectly acceptable for the IRS.
- Bank Statements & Credit Card Statements: Your bank and credit card statements can act as proof of purchase, showing the date, amount, and payee for your business expenses.
- Other Documentation: For some purchases, invoices, canceled checks, or confirmation emails can be proof of purchase.
Key Takeaway
The IRS is concerned with the details of the transaction, not necessarily the format of the receipt. As long as you have documented proof that includes the date, amount, payee, and a clear business purpose for the expense, you're good to go.
Maintain Records Of Business Travel Spends
If your business requires your employees to stay on the road often, you must have a travel policy in place. The next step is to make sure your employees are aware of how they can keep track of their expenses on business trips.
According to a recent survey, business travel expense fraud is estimated to cost US organizations a whopping $1.9 billion annually. In addition to burning a hole in your pocket, inefficient travel request workflows and delayed reimbursements seriously impact employee experience.
Employee dissatisfaction = Non-performance. No business can afford this.
Future-proofing your travel expense management is undoubtedly critical. By future-proofing, we mean finding a solution that covers all futuristic prerequisites, such as travel approval workflow, trips, audit trails, automatic credit card reconciliation, analytics, and more.
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Review Your Expenses Regularly
Keeping a close eye on your expenses allows you to avoid potential problems. This vigilance can help you identify areas of overspending, sniff out fraud attempts, and uncover inefficiencies in your operations.
Some accountants rely on double-entry bookkeeping, a method that helps catch errors and deter fraudulent activity.
However, a business expense tracker offers a more comprehensive approach. Imagine a central dashboard displaying your entire organization's spending data, including employee credit card transactions. This software empowers you to drill down into spending details and analyze transactions by various categories, merchants, projects, employees, or departments.
Choose Fyle: The Best Small Business Expense Tracking Software
Forget the manual slog of expense tracking! Fyle automates the entire process for small businesses, freeing you to focus on what truly matters–growing your business. Here's how it works:
Text Message Receipt Submission and Automated Credit Card Reconciliation
Fyle seamlessly integrates with all major credit card networks–Visa, Mastercard, and American Express. Get notified instantly whenever a company card is used. Simply snap a picture of the receipt and text it to us–Fyle will automatically match it to the corresponding transaction.
Or, simply text Fyle a receipt picture, and it will be auto-matched when the card data flows in. This means accountants no longer have to wait for bank statements to arrive or chase employees for receipts.
Receipt Collection Via Other Everyday Apps
No more hunting for receipts! With Fyle, submit receipts directly from your favourite apps - Slack, Gmail, Outlook, Teams, or even their mobile app. Plus, Fyle does the legwork for you, automatically extracting key details and assigning expenses to the right categories.
