Managing business expenses can help small business owners maximize their tax deductions during tax season, identify upcoming costs, and budget wisely.
By staying on top of your business expenses, you’re less likely to miss potential deductions, meaning you’ll pay less at tax time (or even get more back)!
But which expenses do you need to pay close attention to? And what are the most effective ways to manage business expenses? We do a deep dive on how to manage business expenses as a small business owner!
What are business expenses?
Understanding your business expenses will help you optimally manage your business as a business owner. Business expenses refer to all expenses involved in the normal course of operating a business.
Various types of expenses arise within small and large organizations. To calculate a corporation’s chargeable operating earnings, business expenses are reduced from revenue on the income statement.
What are common categories of business expenses?
These are the expenses that don’t vary from month to month. Loan payments, maintenance, healthcare insurance, wages, and rent are examples. While many of these costs may fluctuate over time, they are typically persistent for the entire length of a lease, negotiation, or signed agreement.
These are the opposite of fixed expenses, essentially non-fixed costs. Although the overall costs vary with each billing cycle, this expense type invariably arises. This category typically includes utilities. Other variable expenses include inventory, commissions, and credit card fees.
Fixed and fluctuating period expenses
Fixed and fluctuating period expenses might be constant or variable and are incurred regularly rather than per transaction. Mortgages (or rent) are fixed period costs, whereas utilities and insurance are examples of fluctuating period expenses.
Interest expenses can be either fixed or variable. Many interest fees come with period expenses. However, credit card expenditures for traveling personnel can be charged per transaction. Interest deserves its own category because it tells you how much money you’re spending on your borrowing component of the budget.
See also: What Is Revenue Expenditure vs. Capital Expenditure?
Depreciation is often a fixed expense, but it is also worth investigating. Depreciation is essential to determine the ROI of replacing large items. It’s also usually tax-deductible; thus, it should always be considered.
Each month, you estimate variable expenses, but the total figure will change. Monitoring your business expenses allows you to evaluate the most effective financial decisions that are an option for your business.
The importance of managing business expenses
Controlling your business expenses can simplify tax season because many expenses can be claimed as write-offs. If you keep track of your spending regularly, you’re less likely to overlook potential deductions. This implies you’ll have to pay less in taxes (or get more back).
Along with claiming tax deductions, there are other advantages to tracking business expenses. When business owners correctly analyze their spending, they can better understand cash flow, one of the most important variables in a business’s operations.
Furthermore, accurately managing business expenses enables business owners to measure their company’s performance by highlighting the profit margin. It can also provide a transparent financial record to investors, increasing the probability that a business will be able to acquire the money it requires to grow. These insights into your business are invaluable, so managing expenses well will pay off.
Step-by-step on how to manage business expenses for small business owners
Step 1. Open a business bank account
Setting up an independent bank account for company expenses makes it easier to track them and collect them as tax deductions later. Business bank accounts also provide financial liability insurance by keeping business and personal funds distinct. And last but not least, using a business bank account to receive credit and debit card payments from customers can build customers’ trust in your business.
Step 2. Use a dedicated business credit card
The company can build a credit history to acquire financing (and the best financing terms) with a specific business credit card.
Credit also allows the company to make large purchases when it’s just starting. Not unexpectedly, available credit is a measure of successful financial health.
Credit cards assist businesses in negotiating advantageous contracts with suppliers and help safeguard firms from identity theft. Credit cards often provide business benefits, such as business incentives, cashback on purchases, or travel rewards.
Step 3. Record all business expenses promptly
Here are 3 tips that will help with that.
Tip 1. Choose cloud accounting software to automate record-keeping and track expenses in one spot
Good accounting software allows business owners to designate particular line items by expense category, such as personal, entertainment, meal, travel, capital expenses, and other tags. By doing this, you can easily differentiate expenditures from deductible charges and nondeductible expenses. This not only helps with reporting at the end of the tax year but enables you to review business spending on a granular level and discover where you might be able to save money.
Cloud accounting software is even more efficient. It allows you to track, manage, and update your business expenses on the go. This is a huge plus for busy entrepreneurs and business owners as they can access a network of information with one 1-click.
Tip 2. Connect your bank account to your accounting software to import transactions
When you link your financial institution to your accounting software, your transactions are immediately imported as they occur. Using accounting software with this feature will make tracking and managing your costs much easier.
You’ll be less concerned about missing a transaction with automatic importation, especially if you use a separate bank account and cards for business expenses. Every time you log in, all your new spending will appear under your transactions, and it will be up to you to appropriately categorize them and link them to their related receipts. This reduces the time you’ll need to spend on bookkeeping and ensures that nothing is overlooked.
Tip 3. Keep track of your receipts
Receipts are required for tax purposes, as they serve as proof of major purchases that you may wish to claim as work-related costs, so it’s critical to have a system in place for recording these.
We have already published an article on the best ways to store your receipts. If you haven’t already seen it, take a moment to discover Shoeboxed‘s suggestions on the most effective ways to keep your receipts organized!
Step 4. Digitize receipts with a receipt scanner
Sitting down at tax time with piles of paper receipts on your desk can be stressful. Challenges include finding out which receipt corresponds to which expense (especially if you have personal and company purchases on the same receipt) because ink fades. Receipts become more difficult to read with time.
We recommend you safeguard the full amount of tax write-offs by digitally collecting and filing your receipts as you go.
When you incur company expenses, quickly photograph them with a receipt scanner to turn them into digital data. Your receipts will then be saved to the cloud, completely safe from damage, destruction, or loss.
Shoeboxed is the painless receipt tracking and expense managing solution for freelance accountants and small- and medium-sized business owners, especially those who want to invest in being “audit-ready.” This app doubles as a receipt scanner and organizer, making it the most versatile choice for keeping track and managing business expenses on the go. You can either scan paper receipts with your smartphone or mail your receipts to a Shoeboxed facility to have them scanned and organized.
Shoeboxed‘s OCR engine and human data verification features ensure that the digital versions of your receipts are scanned in precise format, well categorized, and legibly approved by both the Internal Revenue Service and the Canada Revenue Service in the event of an audit. Shoeboxed offers mileage tracking and business card storing features, making it a one-touch app to access all your business’s important information.
Step 5. Review and categorize expenses regularly
Managing business expenses properly is a critical first step toward having the necessary data for better short-term management of your company’s finances. It also improves long-term decision-making that will benefit employees, customers, and the company. The more you review your numbers, the better you will understand them, and the more you will be able to implement financially sound decisions that will grow your business.
It’s a good idea to evaluate your expenses regularly (maybe as part of your weekly review). This ensures that your transactions are appropriately classified, and your reporting remains accurate.
If you’d like to explore more helpful tools, tips, and tricks for tracking business expenses, look at this article: How To Track Business Expenses: 15 Best Tips & Tools.
Frequently asked questions
Small businesses have a lot of expenses. Some costs are associated with starting a business, such as purchasing equipment or developing a website. These costs are typically incurred only once. Other costs are ongoing, such as rent, utilities, and marketing. However, the largest expenses tend to be overhead and operating costs. Here are the top 5 expenses for most businesses:
1. taxes and insurance
2. payroll and human resources
3. overhead and operating expenses
4. employee benefits
5. inventory, materials, and supplies
You must keep receipts for all your business-related expenses if you’re a business owner. These are referred to as “business tax receipts” by the IRS. If you want to apply for tax deductions with business expenses on your tax return, the IRS requests you maintain all supporting documents that verify the purchases with detailed information.
Step 1. Establish a designated business bank account for your business, separating it from your personal account.
Step 2. Select receipts for storing and organize them in the best way for your business.
Step 3. Customize a spreadsheet to track your expenses.
Step 4. Choose a suitable accounting software depending on your business needs.
Following these 6 tips will help you keep track of business accounts effortlessly.
Tip 1. Separate personal and business expenses.
Tip 2. Store, save, and organize your business documents properly. You can store your documents using a simple file cabinet or a digital filing system.
Tip 3. Record each transaction when it occurs.
Tip 4. Choose the right accounting software to help you track and manage your accounts.
Tip 5. Track business performance regularly.
Tip 6. Hire a bookkeeper to ensure all your expenses are recorded correctly and ready in the event of IRS auditing.
See also: Why Do Small Businesses Need a Bookkeeper?
According to the IRS, you can no longer claim miscellaneous itemized deductions unless you satisfy “one of the qualified categories of employment claiming a deduction relating to unreimbursed employee expenses.” Certain deductions are not subject to the 2% limitation of adjusted gross income (AGI). These are known as miscellaneous itemized deductions. You can “claim certain expenses as itemized deductions on Schedule A (Form 1040), Schedule A (1040-NR), or as an adjustment to income on Form 1040 or 1040-SR” (US Legal Forms).
Bonus infographic: Step-by-step on how to manage business expenses for small business owners
If you’re starting a business or planning to expand soon, you must keep detailed and accurate records of your business spending. This will not only help you maintain a healthy cash flow and lower your taxable income, but it will also support you in growing your business.
You might also be interested in:
- The Ultimate Receipt Organization & Management Resource
- Tax Audit Prep: The Absolutely Non-Scary Guide
- 5 Best Ways to Store Your Business Cards
- Five Foundations of Personal Finance: How to Plan Your Future
- Rydoo vs. Shoeboxed: Which Is The Best Receipt Tracking App?
Originally published March 29, 2022. Updated on September 26, 2022.
Shoeboxed supports multiple methods for receipt capture: send, scan, upload, forward, and more!
You can stuff your receipts into one of our Magic Envelopes (prepaid postage in the US). Use our receipt app (iPhone, iPad and Android) to snap a picture while on the go. Auto-import receipts from Gmail. Or forward a receipt to your designated Shoeboxed email account.
Turn your receipts into data and deductibles with our expense reports that include IRS-accepted receipt images.
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