Spending is part of life in business. But what distinguishes those businesses building real wealth from those just scraping by is that they know where every penny goes, and they know why it matters.
Too many business owners track expenses the easiest way possible when starting out. Receipts go into a pile, a spreadsheet is created, or the person assumes the bank statement will reveal all come tax season. Sure, that works for a month or two. However, when it comes time to arrange or categorize money that’s spent, people not only miss out on opportunities to save money, but they also complicate their own lives.
Getting Your Categories Straight
When you categorize expenses like you’re “supposed” to, it’s not just for neatness. It’s to create a clear picture of your business operations. Put everything together, and you can never find the patterns. You will not realize, for example, that your software subscriptions creep up to more than double what they’re supposed to be after a year of consistent payments. You won’t see your shipping costs skyrocket compared to what you initially said you’d spend. Only when things are sorted into the correct buckets do those patterns emerge.
Furthermore, the IRS needs this categorization. Different types of expenses come with different guidelines, different levels of allowable expenses, and different types of proof needed. Get it correct from the onset, and tax season becomes significantly easier. A qualified tax accountant can help you create categories for their purposes while giving you beneficial insights into your business operations.
Which Expenses Are Worth Tracking?
Not all business expenses are created equal; some matter more than others for tracking purposes.
First and foremost is the cost of goods sold. Whether you’re purchasing products to resell to others or items to make products, these significantly impact your gross profit margin. With proper tracking, you can understand how much everything costs versus what you gain.
Separating office supplies from office equipment is a must. The stapler you bought at Staples is an office supply. The computer you got at Best Buy is a piece of equipment that gets written off yearly (over several years), not immediately (unless certain provisions are advantageous).
Meals and entertainment are tricky categories, especially since the rules recently changed about who can deduct what business meals. While some meals are 100% deductible (when with a client), others are only 50%, and some are not deductible at all. Noting the reason for each meal meeting makes a world of difference come filing time.
Home office expenses can be genuinely lucrative if tracked correctly. A legitimate home office (not just working from your couch) enables you to deduct part of your rent payment, utilities, etc., but “legitimate” has a specific meaning and can only be proved through documentation if it means having a space dedicated solely to the business purpose that regularly used.
Don’t Forget Your Mileage
Vehicle expenses are one of the biggest missed opportunities outside of home office expenses. Business miles have value, but only if they’re tracked. You can either track what you actually spend; gasoline, insurance repair, depreciation or use the standard mileage rate deduction (which is often more favorable and less difficult to prove).
For most people, the standard rate works in their favor with less annoying documentation required, except mileage logs. You need to track the date, where you started, where you went, why it was business related, and how many miles it was (and yes, it’s annoying to have to do so by hand—all that driving adds up). But when those miles amount to several thousand dollars in deductions, tracking is worth it.
Technology Helps Here
Fortunately, manual tracking is no longer necessary as technology has bettered accounting software to automatically sort these expenses. Link your bank accounts and credit cards, and most transactions go through automatically based on where money was spent without you needing to do anything except check.
Apps can also take pictures of receipts once something’s purchased, pull out the important details and document them digitally instead of wading through mountains of paper only looking for one tiny receipt three months later.
That being said, technology isn’t foolproof. Expect to check in consistently to correct mistakes or deal with one-off purchases that should not be categorized automatically. But as long as technology does most of the heavy lifting and leaves you with simple parameters and options—everyone wins!
Where It’s Worth Tracking Expenses
Tax time becomes easy. You know where everything is thanks to proper organization throughout the year so preparing your return is a snap—not a hassle trying to recall where everything went with the best guesses possible instead.
But even beyond tax season, proper expense data allows for better business decision-making down the line: Increase prices? Your cost tracking shows if you need to or if it’s too much; skip it. Should that marketing campaign continue? Compare what’s spent vs what’s earned back from that campaign. Need a loan? Banks require organized paperwork showing you’ve got your finances in order.
Making It Happen
If this process seems overwhelming, start small. Focus on mastering generalized categories that make sense for bigger expenses; then add them as things become second nature over time.
Schedule time weekly to assess what’s come in or gone out and arrange expenses; fifteen minutes every Friday beats hours every few months in a panic trying to remember what happened when. Making it part of your ritual, like assessing emails or contemplating your week ahead, helps mold it into your flow.
It’s not always those businesses bringing in real wealth who’ve got all the wealth—they’re most often those who have control over every cent that goes in and out and purposefully chooses how much they spend in any given area at any given time based upon awareness. Proper expense tracking makes that happen!
