Tracking business expenses sounds tedious because most of us prefer the easiest route in life and detest daily duties. But what if tracking your expenses could prevent unnecessary loss of money? And improve employee morale? And perhaps even protect you from hefty IRS fines?
Yes, tracking can do a world of good for your business. You’ll feel the immediate effects when you file taxes, as the process will be faster, and you’ll have all the information necessary to write off many of the expenses. A write-off is a legal deduction that allows you to decrease your tax bill.
“To be deductible, a business expense must be both ordinary and necessary,” says IRS.gov. “An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
To verify the expense and prove that it was “ordinary and necessary,” you’ll need to have everything recorded. The IRS has never been satisfied by general descriptions and vague recollections.
“Keeping track of business expenses means more than keeping receipts and entering amounts in a ledger,” explains a finance guide from the Houston Chronicle. “The Internal Revenue Service asks you to categorize your expenses. This is because some expenses qualify for full deduction, while others may only net a partial deduction.”
Common expense categories used by small business owners include:
- Meals and entertainment
- Home office
- Office supplies
- Professional services
- Professional development
By carefully placing your expenses in the proper bucket, you’ll set yourself up for success year-round. Neglecting this important exercise comes at your own peril. Here are 5 hazards of not keeping your finances organized.
- You’ll owe more in taxes: The less you track, the less you can subtract. If you don’t make an effort to track and categorize your spending, you won’t be able to lower your tax bill in April—deductions require receipts, invoices, and other documentation.
Perhaps you enjoy paying higher taxes. But if you’re like most small business owners, you don’t have extra money lying around to pay extra taxes. If for no other reason, track your expenses for the sake of your bank account.
- Your employees get burned: Let’s say you send one of your best employees to a trade show in Chicago. Like any reliable teammate, she saves the receipts from her travel, lodging, and food so that she can be reimbursed upon returning to the office.
But if you’re negligent in your expense tracking, you won’t be able to accurately manage employees’ receipts and expense reports. Your star employees, such as the woman who traveled to Chicago, will have to deal with delayed reimbursements. And there might even be errors when their checks finally do arrive.
This situation is a recipe for disaster, as your mishandling of finances can destroy trust with employees. Every extra day they have to wait for a reimbursement check can cause significant damage.
- Your money management never improves: Most small businesses are on a mission to control costs. But those efforts will always be muddled if you aren’t tracking the details of your costs. Basically, your budget is partially blind without expense tracking. And you’ll never be able to identify problem areas and break bad habits unless you consistently track those details.
- Profitability is a mystery: Speaking of money management—expense tracking allows you to calculate the profitability of your business. In many ways, this number is the holy grail of financial metrics. But you can’t calculate revenue minus expenses unless you know exactly what your expenses are.
Real-time tracking makes it possible to quickly deduce real-time profitability. This knowledge keeps your business running efficiently and allows you to make informed decisions on strategy.
- You can’t identify spending issues: Even the best businesses have blind spots. Maybe it’s paying too much for international shipping. Or you might have a few employees who eat at extravagant restaurants while on business travel.
Whatever your issues, you won’t be able to reign them in and improve the situation without proper expense tracking. The more details you have, the faster you can shore up your spending and improve your profitability.
As you make expense tracking a regular occurrence, you’ll find it gets easier. Eventually, it’ll even become a habit that takes almost no effort and still yields important benefits for your business. So make the decision today to become better at your tracking. It could be one of the biggest things holding your business back from greatness.