Tracking expenses can feel like a full-time job, especially if your business requires daily purchases or frequent travel expenditures. But failing to track or inaccurately tracking expenses can lead to a host of problems
Without a clear view of costs, it becomes impossible to efficiently manage cash flow and prepare for the future. Further, valuable tax deductions are lost if you don’t accurately track expenses over the year.
Fortunately, the right tracking system can make a world of difference, and implementing one may be far simpler than it seems.
Whether you’re a sole proprietor or a business owner overseeing numerous employees, these tips can help you stay on top of mileage and other business expenses.
1. Separate your business and personal spending
The first step in accurate expense tracking is to limit your business spending to a specific business account. This means opening a business checking account and using it as the exclusive funding source for business purchases.
The same logic should be used when making purchases with a credit card — apply for and use a business card, not your personal credit card.
2. Use a designated checking account or credit card
In the past, business owners and consumers alike were often forced to keep meticulous logs in order to track spending. And while those logs are still an important piece of the puzzle, today’s online banking platforms often take away much of the manual labor.
In most cases, your online banking platform will provide you with all the pertinent info regarding transactions, including the amount, date, and the payee. Further, many banks and credit card companies allow online user to download an activity report, which can be used to further filter and record your expenses.
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3. Log info regularly
Whatever method you choose to implement, regularity is the key to success. For some, particularly those who rely on manual entry methods, a daily log will prove to be the most efficient way to keep track of expenses.
Others, however, may find that a weekly, bi-weekly, or monthly schedule is just as efficient. However, don’t wait too long. The longer the gap between spending and logging, the more likely you are to forget, lose, or omit vital information.
In your log, make sure to note the date, total amount, and nature of the purchase. Though these logs certainly don’t need to be super detailed, providing basic information will help you segment your expenses when it’s time to budget and provide documentation in the case of an audit.
4. Use an expense tracking app
While the good ol’ pen and paper combo, or even the note feature on a smartphone, can serve as an easy expense recording tool, there is certainly room for error. There are numerous apps that can help streamline and add integrity to the process, some of which even integrate with your accounting software.
As you review your app options, it’s a good idea to take note of what type of expenses you can track. For example, Expensify and TripLog both allow you to track mileage and business expenses in one place, but that’s not always the case.
In addition, it’s also important to take note of any limits that make be in place. Some apps are free for a single user but require payment for more than one user. Similarly, other apps limit the total amount of expenses, employees, or vehicles you can track.
5. Have a clear expense tracking and submission policy
If you’re responsible for reimbursing employees for their expenses, it’s essential that you create a clearly defined expense submission policy. This should include things like mileage rates, an outline of acceptable expenses, and submission deadlines (e.g., within 5 business days of the purchase).
Further, it’s important that you specify what documents should be included. At the very least, you’ll want employees to save receipts and record mileage, where applicable.
6. Set limits
In reality, limits fall into the expense policy, but the notion is important enough to merit its own section.
If you’re reimbursing employees, it’s important to explicitly state any limits or spending criteria that will dictate reimbursement. By doing though, you can set behavioral expectations (e.g., no elaborate lunches) and maintain control of your operating budget.
For instance, you may want to set limits on how much an employee can spend on meals, what type of airfare you’ll reimburse (e.g., first class vs business class), or maximum hotel stay expenses.
7. Know what’s deductible
Since taxes represent a primary reason to practice regular expense tracking, it’s helpful to know what type of expenses you can and can’t deduct.
In general, the IRS states that business owners can deduct any expense that is “both ordinary and necessary.” Of course, it can be hard to determine exactly what that means. If you’re unsure if a business expense is considered ordinary and necessary, your best bet is to consult the IRS small business deductions page as well as your accountant.
As a business owner, tracking expenses can be a challenge, but doing so can make it easier to run your business and manage your finances. The tips above can help you create a strong process that can alleviate some of the pain points often associated with expense tracking.
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