Few small company owners want to spend extra time dealing with financial matters. However, to avoid expensive problems, you must devote the appropriate time to expenditure monitoring. You’ll avoid IRS penalties, anticipate financial shortages, and, perhaps most importantly, know when to grow, spend, or save.
Tracking receipts is easier than tracking expenses. It explains how to monitor your company’s expenditures through 6 steps properly.
Receipts should be digitized.
You may not have a shoebox full of receipts, but are you arranging them in the most efficient manner possible? It is necessary for accurate bookkeeping, accounting, and tax filing.
While you may maintain paper copies of your receipts as a backup, digital receipts will provide you with greater safety and less effort. Start by choosing one of the following:
- Scanning paper receipts and saving them on your computer or uploading them to a cloud-based system like Google Drive are good options.
- Make use of a receipt management app. Take a photo of the receipt or put in the transaction data using Expensify, for example.
- You should already have digital versions if you have a POS system that gives customers e-receipts.
You should maintain receipts for at least three years, the standard look-back time for an IRS audit; however, records for company spending under $75 are not required. You’ll realize why receipt tracking is crucial as you learn how to manage company spending.
Decide on an accounting system.
Explained, bookkeeping is documenting and arranging your financial transactions to ensure that your records are correct and current. You want to be able to answer the question, “What is your cash position?” frequently.
It’s critical to understand the distinction between bookkeeping and accounting. Accounting entails similar activities but focuses on financial analysis and strategic planning rather than expenditure reporting.
Maintaining your finances is a difficult task. How can you do it? Here are several possibilities:
Learn the fundamentals of accounting with a beginner’s guide, then get a ledger notebook and a pencil to keep track of your everyday transactions. Monthly, go through your receipts and prepare the relevant statements and reports.
Bookkeeping software provides a lot of value to small company owners. You can link your books with your company bank account or credit card to instantly enter transactions and handle many tasks such as receipt monitoring and custom reporting.
Choose an accounting system for your company.
Your accounting approach heavily influences how you calculate taxes and monitor revenue and spending on financial statements. There are two basic accounting procedures for businesses, and although the cash approach is the more common, both offer advantages.
Method of payment with cash
The cash method is used by most small company owners, in which revenue is recorded when it is received, and costs are recorded when they are paid. It is less time-consuming to maintain records than the accrual technique. However, one disadvantage is that you obtain a month-by-month estimate of profitability.
Let’s imagine you work more jobs in October and fewer in November, but you don’t get paid until November for the jobs you worked in October. In retrospect, November may seem more successful than it was.
Method of accumulating
The accrual approach requires you to record revenue as soon as it is generated and costs as soon as they are incurred. One advantage of the accrual approach can already be seen in the example above. The tasks you completed in October are credited to October. One disadvantage is that the month’s revenue statement (profits vs losses) may seem to be in good shape when you haven’t yet been paid for the task.
Accounting software should be used.
There’s a reason why more than half of small firms use accounting software to monitor spending. It’s a simple method to keep track of your finances and construct a budget. You don’t want to make a tax mistake because of a smeared number; therefore, it’s more accurate than notebooks and spreadsheets.
Keep a record of your company’s costs.
This step may seem unnecessary, but learning how to manage company spending also means knowing which expenses the IRS is most interested in. The IRS looks for inconsistencies in the following costs and deductions:
Recognize your tax obligations.
There are varied tax requirements for sole proprietorships (self-employed business owners) and other corporations, similar to business bank account needs.
If you’re an alone proprietor, you’ll record your company profits and losses on your tax return and pay the current individual rate. In addition, you’ll have to pay self-employment taxes.
It becomes more difficult for companies, particularly with the constant changes in state and federal tax regulations. Ensure you know your tax rate, which IRS papers you’ll need, how to pay your shareholder tax, and other tax filing obligations.
According to one poll, 40% of small company owners spend more than 80 hours yearly on tax preparation. Fortunately, knowing how to manage company spending properly can save you time for tax filing.
Take advantage of your small company tax deductions.
Even though tax preparation might be stressful, it is one area where you have a lot of influence. Knowing which costs are tax-deductible as a small or mid-sized company owner is important so you don’t miss out on savings.
Once you know the potential small company tax deductions, you may make minor adjustments to save money, such as converting regular business meetings to lunch meetings. As is customary, meticulous record-keeping is your best friend.
Look for tax incentives particular to your sector, such as this for secondhand retailers, to turn tax time into money-saving.
Last but not least
Use these nine steps to record your spending more meticulously and better understand your financial situation. If you’re undertaking any of the above processes for the first time, getting advice from a certified public accountant, bookkeeper, or another financial professional is always a good idea. Finally, ask your payment processor about methods to save money on cost tracking software tailored to your industry.