7 Tips for Tracking Your Small Business Expenses
Tracking expenses and revenue for small business owners is necessary to ensure a healthy business. Accurate financial information is needed to help make business decisions. Check out these tips for when you are starting a business or for when you are in your early years.
1. Have a separate business checking account.
Mixing personal finances and business finances can make it difficult to track how well your business is doing. In some cases, maintaining separate accounts may be helpful in liability protection. One of the greatest benefits of maintaining separate business bank accounts is for tax preparation and audit purposes. The more crossover you have between personal and business finances, the more difficult it is to make it through an IRS audit. In a case where you can’t open a business account, use a separate personal account as long as it doesn’t violate laws or the institution’s policies.
2. Have separate credit cards.
Mixing personal and business finances on a credit card is a poor practice just like mixing finances in a bank account. Many credit card accounts will automatically categorize spending for you, which makes it easier for you to track your business expenses. Businesses can establish a credit history, just like individuals can establish a personal credit history. This may be helpful when trying to get business loans.
3. Know what expenses are valid deductions and track them in appropriate categories.
The IRS expects you to only take valid business deductions on your tax return. Valid business deductions include ordinary and necessary expenses. If your business is remote bookkeeping then bookkeeping software would be an appropriate expense, but an online game would likely not be a valid expense. If you are a sole proprietor or self employed, you will be filing your taxes on a Schedule C. It is a good practice to use expense categories that match up with the ones already identified on the Schedule C when possible.
4. Keep good documentation.
Good accounting practices and the IRS guidance requires certain elements for recording and maintaining records of expenses. Invoices and receipts are incredibly important. Bank account and credit account records are important, but are not adequate alone. Here are the elements the IRS wants you to have for valid expenses:
- Purpose or description of the Expense (electricity, electric bill)
- The date paid (02/22/2022)
- To whom it was paid (Lighting Electric)
- How much was paid ($101)
- Proof of payment (receipt, canceled check)
Please note that there have been numerous IRS audits in which it has been determined that bank account and credit card statements have not been adequate documentation, if depending on those statements alone.
5. Digitize and backup.
Keep digital copies of receipts, invoices, and of all transactions. With cell phone cameras, scanning apps, and scanners, this is easier than ever. I’m still a fan of keeping hard copies, but in most cases a digital copy is adequate. Always have a separate backup of digital documents, whether printed copies or on a digital platform, harddrive, or other digital method. There are apps and software that can record physical receipts when converted to digital format, saving time with our bookkeeping.
6. Use accounting software or apps
In some cases when there are not too many transactions, using spreadsheets or even a physical ledger may be adequate. But for time savings and accuracy, there are many options for software to track your expenses and revenue. In many cases, the transactions can be automatically categorized, such as an electric bill being placed under utilities.
There are free options that allow some integrations with bank accounts, credit cards, and money transfer software/apps. And if those aren’t enough for your needs, you can either upgrade from the free software, or you can choose another more capable software for a fee.
7. Monitor and review
Establish a regular process to monitor, review, update, and adjust your tracking of expenses and revenue. Perhaps monthly is a convenient frequency to check and make sure you have all your documentation and everything is in the right category. Maybe for some parts of your tracking, you need to do it weekly or even daily.
What matters is what works for your business and that it is a continual process. If you wait until the end of the year or until tax time, you are more likely to have errors and missing information. Fixing mistakes a year later can be difficult. And not knowing the financial status of your business is a poor practice.
Tracking small business expenses well is an important part of having a successful business. It is okay to have a period of trial and error when trying to figure out what works best for you and your business. In our ever-changing world even well established businesses adjust their practices when the need for change arrives.
Happy profit making.
Jerry Zeigler is a Navy veteran who serves service members with financial counseling and education. As an Accredited Financial Counselor®, he is a member of the Better Financial Counseling Network and is the owner of JZ Financial Management. As a tax professional and Enrolled Agent, he has a passion for helping taxpayers navigate taxes.