Tracking, recording, and analyzing expenses are the key components of financial management, and if done properly, it can greatly increase the chance that the company will avoid financial problems. If a person track business expenses it will help him/her to plan the business in a better way, predict delay caused by cash flow, and ensure that the basic business expenses, such as payroll, are always covered properly.
Business expenses are “ordinary and necessary” expenses incurred in running your business, such as inventory, labor costs, and rent. Business expenses, also known as deductions, are the costs of running a business. They are included in the income statement. These expenses are deducted from business income to reflect the company’s net profit or loss and taxable income.
The seven easy steps to Track your business expenses are as follows:
#1 Opening a Business Bank Account
As a startup entrepreneur, one is required to open a business bank account. Once that account is up and running, it can only be used for business transactions.
While one is required to use a personal bank account for business purposes, having a separate business account makes it much easier to properly track and record the spending.
#2 Consult an Accountant for Tax Management
With accurate financials in hand, you can begin fine-tuning your tax strategy. If your business is sufficiently sophisticated, with fairly high income and expenses, it is often worth visiting an accountant for advice.
That doesn’t mean you have to hire one as an employee. Many small businesses don’t have the cash flow or the need to do so. Simply contact a Certified Chartered Accountant (CA) firm and contract them to help you with your tax strategy by proper TDS Return filing and getting a GST Registration in India for the business for benefits from the government.
With an organized operating expense tracking system and clean financial statements, any CA will be happy to work with you. It makes their work much smoother, saving them time and money. They can help you lower your tax liability each year by reorganizing your business’s legal structure, finding all potentially deductible expenses, and making contributions to tax-advantaged accounts.
#3 Choose a Cash or Accrual Accounting System
One must also choose between cash accounting and accrual accounting when creating the accounting system. Most small businesses, sole proprietors, and freelancers use cash accounting because it’s so easy. When someone is using cash accounting, he/she records transactions as they occur. For example, you record income when it is received and payments when they are made.
Accrual accounting is more in-depth and is a necessity for growing businesses, businesses with employees, or larger businesses. With accrual accounting, the record revenue is taken when a product is sold, not when the payment for that product is received. The same goes for expenses that are recorded when you receive the bill, not when you pay the bill.
#4 Connect with the financial institutions
Small business expense tracking can be simplified by connecting financial institutions to accounting software. While some may not like this option, it is actually very secure with built-in data protection measures. If one connects the bank, he/she can automatically download all bank transactions directly into the accounting software and in most cases automatically post them to the correct account.
#5 Manage the receipts properly
Another way to make sure you’re tracking your business expenses is to use a mobile app that comes with your accounting software. If your software does not provide such a program, you can choose to use an expense management program that is integrated with your software.
These apps usually allow you to manage expenses on the go, so you can take a photo of the receipt and upload the image to your software, where it will be saved and later added to the relevant expenses. If it is a reimbursable expense, the receipt can be used to create an expense report.
#6 Recording of all the expenses
Once you have an accurate picture of the company’s spending trends, you’ll have everything you need to spot potential problems. Specifically, one can look for areas where he/she is spending more than it is required and make adjustments as needed.
Spending too much doesn’t necessarily mean you’ve been irresponsible with your budget, just like in your personal life. It could also mean that you had unexpected operating expenses or that they were higher than you expected.
As a result, tracking your expenses can help you create more accurate expectations, learn from differences, and identify areas where you can save money. For example, you can plan future estimated tax payments using current income and expenses.
#7 Opt for a Accounting Software
Accounting software is also great for this kind of analysis. You can use it to facilitate many useful activities, such as creating an expense report, comparing multiple data ranges, or drilling down into a financial report.