As a small business owner, you are likely familiar with recording and keeping an eye on transactions. However, are you thoroughly monitoring business expenses and income? Learn the steps to take for tracking business expenses and income and the importance of tracking them below.
Steps for tracking business expenses and income
Review the steps below to help get your business on track.
1. Open a business bank account
After you start your business, you need a secure way to separate your business and personal funds. The first step to start tracking your business expenses and income is to open a business bank account.
Having separate bank accounts helps keep records organized and distinct for tax purposes. Not all types of business structures are required to have separate bank accounts. However, separating funds may help you efficiently track income and expenses and plan for taxes.
Consider also opening a business credit card to avoid mixing personal and business expenses and build business credit.
2. Select an accounting method
Before you can start tracking income and expenses, you must choose an accounting method.
The two main accounting methods include:
- Cash basis
- Accrual basis
The cash-basis method is the simplest accounting method for small business owners. With the cash method, you record income when you receive it and expenses when you make a payment.
The accrual basis is more complex than the cash-basis method and uses additional accounting categories. In accrual accounting, you record income and expenses when you incur them, regardless of when you receive money or pay.
Consider the size of your business when selecting your accounting method.
3. Utilize an accounting system
Accounting can be challenging for small business owners. You must accurately record your business expenses and income so your data gives you a realistic snapshot of your business’s financial health.
Some options you have to track your income and expenses include:
- Utilizing a spreadsheet
- Hiring a bookkeeper or CPA
- Using accounting software
Using a spreadsheet allows you to have complete control over tracking your income and expenses. However, spreadsheets can result in errors. You may be more prone to making mistakes or forgetting to regularly update the spreadsheet.
If you are starting your business and would prefer to have a professional track your income and expenses instead, consider hiring a bookkeeper. You can always take over once you have a better grasp on how to track your income and expenses.
Consider an online accounting software to streamline the process by saving you time and making it easier to track income and expenses. Cloud-based software allows you or your employees to handle your accounts receivable, accounts payable, and other transactions at any given time.
Periodically re-evaluate your methods. As your business grows, you may want to consider advanced recordkeeping methods versus a do-it-yourself spreadsheet. Continually reassess the amount of time and money you spend tracking your income and expenses.
4. Track expenses
After you establish how you will record your income and expenses, you must keep track of expenses on a regular basis. Tracking your expenses allows you to monitor the growth of your business, build financial statements, keep track of deductibles, and prepare tax returns.
From the start of your small business, you should organize receipts (e.g., vehicle-related expenses) and other important records.
Keep receipts for any business-related purchases that you, or your employees, make. Simplify the process by sticking to the same business credit card or bank account for purchases.
Understand which expenses are considered tax deductible. Some common tax deductible expenses include phone, transportation, or entertainment expenses. Consult an accountant or professional to determine which of your expenses are tax deductible.
5. Record expenses and track income
You must record business expenses in a timely manner to know where your business stands. Record your business expenses and track total income on a regular basis, such as once per month.
Utilize a recordkeeping method to remain organized, promptly track expenses and receipts, and prevent your business from falling behind.
Review your accounts to know where your income stands and how your business is performing. Make adjustments if you notice decreases in income. Consider cutting back on business-related expenses, like business meetings that require traveling.
Importance of tracking business expenses and income
Tracking your expenses and income on a regular basis gives you the most up-to-date financial information about your business.
Tracking expenses shows you how much you spend in a period and what items you purchase. If you ever need to cut down expenses, your receipts and accounting records can be your guide.
Keep an accurate record of your income to help determine your business’s success, if you can afford to grow your business, and what areas you need to improve.
Looking for a way to record your business expenses and income? Patriot’s online accounting software is a simple solution for your recordkeeping needs. Try it for free today!
This is not intended as legal advice; for more information, please click here.