SANDRA LAZAR
ARE YOU TIRED OF KEEPING TRACK OF YOUR ENTIRE BUSINESS IN YOUR HEAD? ARE YOU READY TO START MAKING BUSINESS DECISIONS BASED ON FACTS INSTEAD OF PURE GUT FEELING? THEN THE FIRST THING YOU NEED TO DO IS BEGIN PROPERLY TRACKING YOUR BUSINESS EXPENSES.
BUSINESS EXPENSES
Business expenses are the things your business spends money on to keep operating. They include things like:
- Rent
- Computers and other equipment
- Phone, internet, and utility bills
- Marketing and advertising costs
- Bank and merchant fees
- Gas, car, and other transportation costs
- Postage and shipping
Keeping tabs on these items helps you keep track of cash flow, takes the guesswork out of paying estimated taxes and claiming deductions, and most important, it helps you understand what you need to do to increase your profitability.
You’ll also need to keep track of your business expenses if you ever approach a bank for a loan, want an investor to put money into your business, or get audited.
Catching up on a backlog of improperly tracked expenses can take some time. However, it’s a fairly straightforward process.
HOW TO KEEP TRACK OF BUSINESS EXPENSES
Step 1: Separate them from your personal expenses
Tracking business expenses can be difficult when your business purchases come out of the same checking account you use for personal expenses. It also makes it challenging to understand the health of your business when you have additional expenses that aren’t relevant to the business.
For these reasons, it is best to open a separate, dedicated business bank account — with its own dedicated debit card or business credit card — for your company.
Step 2: Make sure you’re categorizing the transactions properly
Properly categorizing and recording your transactions helps you claim more deductions, make your life easier if you ever get audited, and generally makes looking through your financial records a much less painful experience.
Step 3: Hold onto your receipts
Did you know that the IRS requires you to keep records and receipts for any expenses you claim on your taxes at least three years after filing the return?
A great way to avoid breaking this rule while also saving time on your bookkeeping is to digitize your receipts using a receipt-scanning mobile app like Shoeboxed or a cloud-based system like Dropbox, Evernote, or Google Drive.
Step 4: Reconcile expenses with your bank accounts
This involves looking at the expenses you’ve recorded in your bookkeeping system and making sure that they match up with the expenses on your bank statement.
Bank reconciliations are your first line of defense against any mistakes you might make when recording your expenses. Ideally, you should be doing them at least once a month.
Step 5: Make sure you aren’t missing any of these popular small business expenses
To make sure you aren’t forgetting anything, we’ve put together a large list of the most common types of business deductions, broken into 16 different expense types.
- Advertising and promotion
- Business meals
- Business insurance
- Business interest and bank fees
- Business use of your car
- Contract labor
- Depreciation
- Education
- Home office
- Interest
- Legal and professional fees
- Moving expenses
- Rent expense
- Salaries and benefits
- Telephone and internet expenses
- Travel expenses
Remember that even if an expense is ordinary and necessary, you may still not be able to deduct all of it on your taxes. The rules around the tax-deductible portion of the rent you pay for your home office, client entertainment, and R&D costs, for example, can get particularly complicated.
Step 6: Make expense-tracking a habit
If you’re a busy small business owner with a million things to do, it’s easy to let bookkeeping fall by the wayside. One way to avoid that is to make it a habit.
Try setting aside and scheduling a ‘bookkeeping day’ once a month to stay on top of your transactions. Use that day to enter any missing transactions, reconcile bank statements, and review your financial statements from the last month.
Sandra Lazar graduated Brooklyn college in 1995. She has served as a CFO in a variety of businesses for the past 25 years.
