The Importance of Tracking Business Expenses
Tracking expenses related to financing in business is very important for the smooth running of a business. Proper accounting will improve cash flow so that your business can survive or even thrive.
Plus, careful expense tracking helps your company qualify for valuable tax deductions and reduces your adjusted gross income. Here's what you need to know about business expenses and how to track them.
What is Business Expense?
Business expenses are expenses that are directly related to starting a business and maintaining operations. Examples of business expenses include purchasing inventory, payroll, salaries, and office rent.
Business expenses fall into one of two categories:
- Cost of goods sold (HPP)
- Operating costs
Separating business expenses from personal expenses is essential for proper small business tax management because business expenses can help you qualify for a tax deduction. A tax deduction is applied to your taxable income, potentially lowering the overall rate you'll pay.
Common Business Expenditure Classifications
Grouping can inform how you prioritize expenses in your small business budget. This makes it easier to find areas that can be trimmed. In general, here are some business expense categories to choose from:
Fixed cost
Fixed costs do not change from month to month such as mortgage costs, depreciation, insurance, wages and rent. While these fees may change from time to time, they are usually fixed for a certain period of time.
Variable Cost
Variable fees are mandatory fees, but the total will vary with each billing cycle. Examples of variable costs include utilities, inventory, commissions and credit card processing fees.
Period Fee
Period fees can be fixed or variable and payment obligations come periodically, not per transaction. Your mortgage or rent will be a fixed period expense, while utilities and insurance are variable period expenses.
Flower
The amount of interest is related to periodic costs. For example, purchasing credit cards for traveling employees can be per transaction. Interest deserves a category of its own because it tells you how much money you lost from the loan portion of your budget.
Depreciation
Depreciation is usually a fixed variable cost, but that too deserves a closer look. Depreciation is needed to help calculate the return on investment on major item replacements. It is also usually tax deductible and should therefore always be calculated.
Types of Business Expenses That Are and Are Not Tax-Deductible
It is very important to have complete and accurate accounting records of any deductible expenses. When tax time comes, you can break down your deductible expenses to reduce your overall tax bill. Here are some business expenses that are tax deductible:
- Payroll costs
- Employee benefits
- Cost of a small house (home office)
- Premium insurance
- Rent or mortgage payments
- Retirement plan
- Equipment depreciation
- Interest expense
On the other hand, there are also some business expenses that are not tax deductible, including the following:
- Political contributions
- Government fines or penalties
- Losses or costs of demolition
- Certain tuition fees
- Legal fees
- Capital costs
- How to Track Business Expenses
For the stability and smooth running of business operations, it is important to track business expenses in an effort to control them. Here's how to track business expenses:
Set up a Business Bank Account
Create a dedicated business bank account to keep your business finances separate from your personal finances. Business accounts can easily generate tax-helping income reports. Business accounts allow companies to get accurate cash flow views to generate income reports. The report will be needed to obtain financing and facilitate the tax return process.
Use Cloud Based Software
Using the best business accounting software via the cloud can automate some elements of tracking business expenses and help manage finances. Linking accounting software with financial institutions can help you better manage your expenses, identify possible tax deductions, and record digital receipts for your expenses.
Manage Receipts
In addition to tracking expenses digitally, take photos of physical receipts for cash payments or payments made with personal credit cards. If an employee takes a client out to lunch and pays with their card, record the transaction by taking a photo of the receipt and sending it for records. Physical receipts include car miles, train or plane tickets for travel, internet bills, and other reimbursement costs.
One important factor for business continuity and development is tracking business expenses, which are closely related to cash flow. Tidy and accurate cash flow data will benefit the company such as recalculating if there are expenses that need to be adjusted, tax deductions, or reliable financial reports for the needs of investors or bank loans.
Tracking business expenses allows business owners to measure how well their business is performing and profit margins. Tracking can also provide clear financial records to lenders, increasing the chances that a business can secure the funding it needs to grow the company.