As a small business owner, you’re probably familiar with tracking transactions and keeping an eye on them. However, do you track your business expenses and income thoroughly?
Many businesses find it difficult to maintain their operating costs. The Federal Reserve Small Business Credit Survey found that paying operating expenses was the most prevalent financial hardship facing small business owners, and 47% of them said they would need personal cash if sales dropped by two months.
One of the fundamental aspects of financial management is the monitoring, documenting, and analysis of expenses. By tracking expenses, a company can better develop plans, anticipate slowdowns in cash flow, and guarantee that the highest costs, like payroll, are always covered.
Learn how to manage and track business expenses and income and how important it is to manage them.
Why Should You Track Business Expenses and Income?
Daily monitoring of your expenses and income gives you the most up-to-date financial details about your company.
Tracking spending reveals how much you spend over some time and what things you purchase. If you’ve ever had to cut expenses, your receipts and accounting records may be your guide.
Keep an accurate record of your earnings to help assess your company’s progress, how you can continue to expand your company, and the growing places you need to develop.
Benefits Of Tracking Business Expenses and Income
There are several meaningful reasons for tracking business expenses and income. First and foremost, it is essential for accurate financial reporting. Without proper records of expenses and income, it would be impossible to prepare accurate financial statements. Accurate financial statements are essential for making good business decisions and attracting investors and creditors.
Another important reason for tracking expenses and income is to help identify areas where money is wasted. For example, suppose a business is spending a lot of money on advertising but is not seeing a similar increase in sales. In that case, it may be time to reevaluate the advertising strategy. Tracking expenses and income can also help identify trends over time, which can help plan for the future.
Tracking business expenses and income is essential to running a successful business. It helps ensure accuracy in financial reporting, identify waste areas, and track trends over time.
5 Steps For Tracking Business Expenses And Income
Review the steps below to help get your business on track.
1. Open a Business Account
After starting your business, you need a safe way to differentiate your company and personal funds. Opening a business bank account is the first step to monitoring your business expenditures and revenues.
It helps to keep documents ordered and distinct for tax purposes by providing separate bank accounts. Not all types of business structures are needed to have separate bank accounts. Separating assets, however, will help you track income and expenditures effectively and manage taxes.
Often recommend opening a business credit card to avoid combining personal and business expenses and building business credit.
2. Select an Accounting Method
Before starting to track your income and expenses, you must have an accounting method. When choosing your accounting system, consider the size of your company. There are two methods-
The two main accounting methods include:
- Cash Basis: The cash-based approach is the simplest accounting system for small business owners. You report revenue when you collect it and expenditures when you make payments using cash.
- Accrual Basis: The accrual basis is more complicated than the cash-based process, which uses different types of accounting. You report revenue and expenditures in accrual accounting when you incur them, no matter whether you earn money or pay.
3. Utilize an Accounting System
Accounting for small business owners can be difficult. You have to report your company expenditures and income correctly so that your data gives you a practical snapshot of your company’s financial health.
Some methods to track your income and expenses include:
- Utilizing a Spreadsheet: A spreadsheet allows you to take control over tracking your income and expenses. However, sometimes spreadsheets can result in errors. You need to be more aware while working on it and not make any mistakes or forget to update the spreadsheet regularly.
- Hiring a Bookkeeper or CPA: When you are beginning your company and would rather have your profits and expenditures tracked professionally, consider hiring a bookkeeper. You can still take over when you clearly understand how to manage your income and expenses.
- Using Account Software: Find an online accounting program to streamline the process by saving you time and making revenue and expenditures easier to track. Cloud-based software lets you or your employees monitor your receivable accounts, payable accounts, and other transactions at any time.
4. Track Expenses
After you decide how to report your income and expenses, you must regularly keep track of expenses. Tracking your expenses lets you control your business growth, build financial statements, keep track of deductibles, and file tax returns. Use the expenses tracker app to track your expenses.
There are many free expense tracker apps available to solve your financial problems. Some popular apps are Mint, EveryDollar, Expensify, PocketGuard, and YNAB. The finance and expense trackers are a budget app that helps you track your spending and plan a budget. You can create a transaction each time, allowing you to add and monitor your every expense.
You also need to arrange receipts (e.g., vehicle-related expenses) and other relevant documents right from the start of your small business. Keep receipts for any transactions you or your staff make for companies. Simplify the method by sticking to the same business credit card or sales account.
Understand which expenses are considered tax-deductible. Many tax-deductible expenses include telecommunications, travel, or entertainment expenses. Consult an accountant or expert to assess which of your costs are tax-deductible.
5. Record Expenses And Track Income
To know where your company is, you must report company expenditures on time. Document your business expenditures and track your overall revenue regularly, like once a month.
Using a record-keeping system to remain organized, track expenditures and receipts promptly, and prevent the company from falling back.
You need to know how to reduce business expenses. Check your accounts to find out where your revenue is and how your company is doing. When you note declines in revenue, make changes. Consider cutting back on costs associated with employment, such as business meetings and travel and marketing expenses.