Managing business expenses can help small business owners maximize their tax deductions and have a better cash flow. It also makes tax time a lot simpler as many expenses can be claimed as write-offs. If you manage your business expenses on a regular basis, you’re less likely to miss potential deductions, meaning you’ll pay less at tax time (or even get more back).
This article will explain which expenses you need to pay close attention to, the importance of managing your business expenses properly, and suggest effective ways to stay on top of your business expenses.
What are business expenses?
As a business owner, understanding all types of business expenses will help you manage the business most optimally. Business expenses refer to all expenses involved in the normal course of operating a business.
Various types of expenses arise within both small and large organizations. The income statement includes business expenses. To calculate a corporation’s chargeable operating earnings, business expenses are reduced from revenue on the income statement.
There are some common categories of business expenses, such as:
- Fixed expenses are those that don’t vary from month to month. Loan payments, maintenance, healthcare insurance, wages, and rent are examples of these. While many of these costs may fluctuate over time, they are typically persistent for the entire length of a lease, negotiation, or signed agreement.
- Variable expenses are the opposite of fixed expenses, essentially non-fixed costs. Although the overall costsvary with each billing cycle, they are required spending. This category typically includes utilities. Other variable expenses include inventory, commissions, and credit card fees.
- Fixed and fluctuating period expenses might be constant or variable, and they are incurred on a regular basis rather than per transaction. Mortgages (or rent) are examples of fixed period costs, whereas utilities and insurance are examples of fluctuating period expenses.
- Interest expenses can be either fixed or variable. Many interest fees comes 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.
- 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 more effectively evaluate which financial decisions you’ll make.
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 how well their company is doing 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 making the effort to manage expenses well will pay off.
Effective ways to manage business expenses for small business owners
1. Open a business bank account
Setting up an independent bank account for company expenses makes it easier to keep track of 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.
2. Use a dedicated business credit card
With a specific business credit card, the company can build a credit history to acquire financing (and the best financing terms) when needed.
Possessing credit also allows the company to make large purchases when it’s just getting started. 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 benefits for businesses, such as business incentives, cashback on purchase, or travel rewards.
3. Record all business expenses promptly
- Choose cloud accounting software to automate record-keeping and track expenses in one spot.
Using good accounting software allows business owners to designate particular line items by expense category, such as personal expense, entertainment expense, meal expense, travel expense, capital expenses, and other tags. By doing this, you can easily differentiate expenditures from deductible charges. 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 within a touch.
- 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 of 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 amount of time you’ll need to spend on bookkeeping and ensures that nothing is overlooked.
- Keep track of your receipts
Receipts are required for tax purposes. Receipts are proof of major purchases that you want to claim as work-related costs, so it’s critical to have a system in place to record these. Keeping your receipts organized is essential for running a successful business and tax preparation.
We have already published an article on the best ways to store your receipts. In case you haven’t already seen it before, take a moment to discover Shoeboxed‘s suggestions on the most effective ways to keep your receipts organized!
4. Digitize receipts with a receipt scanner
As you may be aware, sitting down at tax time with piles of paper receipts on your desk can be stressful. It can be difficult to determine which receipt corresponds to which expense (especially if you have personal and company purchases on the same receipt) because ink fades and receipts become more difficult to read with time.
By digitally collecting and filing your receipts as you go, you’ll save yourself energy and problems. When you make company expenses, make a habit of quickly photographing them with a receipt scanner to turn them into digital data. Your receipts will then be saved in a cloud system for years, completely safe from damage, destruction, or loss.
Shoeboxed is the painless receipt tracking and expenses managing solution for freelance accountants, small- and medium-sized business owners, especially for those who are willing to spend a little more to be “audit-ready.” This app doubles as a receipt scanner and organizer, making it the most versatile choice to keep track and manage 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. Additionally, Shoeboxed offers mileage tracking and business card storing features, making it a one-touch app to access all your business’s important information.
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. It also improves long-term decision-making that will benefit employees, customers, and the company as a whole. The more often you review your numbers, the better you understand them, and the more likely it is to grow your business.
It’s a good idea to develop the habit of evaluating your expenses on a regular basis (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, take a look at this article: How To Track Business Expenses: 15 Best Tips & Tools.
The bottom line
If you’re just starting a business or planning to expand in the near future, you must keep detailed and accurate records of your business spending. It 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.
Try Shoeboxed today to see how we can assist you in managing your business expenses and maximizing your business efficiency!
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