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Does having to sort through mountains of receipts or paid invoices send your nerves over the edge? Do you feel you're never sending the correct stuff to your tax preparer? We've got some tips to help you track your business expenses like the pros (or make you "the favorite" with your pro).
Shrinking the Mountain
The first thing to help you figure out how to tackle the mountain of receipts is the broad areas you tend to spend money in your business - expense categories. In our opinion, the common areas for business expenses are:
Advertising/Marketing - Most commonly, these are the costs of finding new clients for your business (Google or Facebook ads, website, billboards) or reminding your current clients of everything you offer (special mailed updates, e-newsletters, website).
Commissions & Fees - Most commonly, these are fees paid to others for lead generation or proper commissions paid to members of a sales team.
Contract Labor - Most commonly, these are amounts paid to individuals for temporary, short-term work for your company. (Example: a graphic designer making you a logo or designing a template for your social media posts)
Employee Benefit Programs - Most commonly, these are the costs of medical or retirement benefits paid for your employees.
Insurance (Non-Medical) - Most commonly, these are amounts paid for general liability, vehicle, building, or other types of insurance that are not medical or life insurance. (Medical and life insurance would be an employee benefit programs expense.)
Bank Fees & Interest - Most commonly, these are the interest or fees paid to a bank or credit card company.
Legal & Professional Fees - Most commonly, these are the fees paid to professionals (attorneys, accountants, architects, etc. ) for services provided. Many times, these will be companies paid and not individuals.
Office Expenses - Most commonly, these are the costs of keeping your office functional (paper, pens, toner/ink, breakroom supplies, cleaning supplies, etc.).
Rent or Lease - Most commonly, these are the amounts paid to rent the office space your company uses; it can also be for rented equipment in some instances.
Repairs & Maintenance - Most commonly, these are the costs your company had to pay for fixes to anything from the office to the copy machine.
Supplies - Most commonly, these are the costs of producing what your company offers. (Example: A candy company needs to purchase new pans to make their candy; those pans would go here.)
Taxes & Licenses - Most commonly, these are the various taxes paid or licenses needed for the business.
Utilities - Most commonly, these are the public services that help you run your business (electricity, gas/propane, telephone, internet, water, trash, etc.)
Wages - Most commonly, these are the gross wages you pay your employees.
You can always track things more precisely too. Some businesses may have telephone work that involves a lot of long-distance telephone calls; they can track their telephone costs separately from their other utility costs if they like.
The key to having good expense categories is all in the naming. You want each category to be general enough that it can hold the costs you need it to with being so specific that you have a mile-long expense category list. PRO TRIP: Try not to have an account for "other" or "miscellaneous," as those become catchalls for things that should be categorized elsewhere.
Numbers. Numbers. Numbers
Once you have your expense categories created and your mountain of paper sorted into small stacks of receipts by category, it is time to get to the numbers. Here, you can keep things easy or make things difficult - the choice is yours.
The difficult option is using accounting software. Most "home" accounting software options will take care of your accounting needs if you follow their formats and data entry rules. When you start moving data around, things can get frustrating if not handled correctly; usually, an accountant or software specialist is needed to help fix these issues. If data entry and numbers are not your things, then we do not recommend using accounting software. That doesn't mean all computer software is bad.
The medium option is using spreadsheet software. We're not going to use the name that strikes fear into the hearts of many, but many companies like Microsoft, Google, and Apple make fantastic spreadsheet software that you can use to help you track costs. Spreadsheet tracking is perfect for those who like to keep up with their expenses on a monthly level. You can enter your monthly costs, get some totals, and see how things look. This can also help you feel more prepared when it is time to think about tax returns. If something goes wrong, it's usually an easy fix to find in spreadsheet software.
The easy option is keeping your receipts sorted in your expense categories during the year. You can use an accordion folder to help you keep things organized. At the end of the year, you can total your receipts in each category and know that you are ready for your tax return. PRO TIP: When you add your receipts for each category, add them twice to ensure you get the same number back to back. If the number is different, keep checking your numbers to ensure smudges or fading aren't making an eight look like a six.
The easiest option is hiring a bookkeeper or accountant (like us!). We take all the headaches of sorting, categorizing, and adding everything, so you get organized numbers back. Services from bookkeepers and accountants can be as easy or complex as you want to make them. Just have an honest discussion about what you want and the work you want to put into the processes. And never feel like your bookkeeper or accountant is judging you; the information we see is just data to help us balance pennies and get the best tax options for you. PRO TIP: To make your bookkeeper or accountant call you their favorite client, have open conversations with them about your business and expenses, write helpful memo lines on checks, or email over receipts for odd/high costs or new vendors.
The Extra Mile
If you want to go the extra mile with your expense tracking, you can set a yearly budget for your business using those same expense categories. You estimate what you'll spend in each category for the year. Then you compare your tracked expenses to that budget to see if costs increased, new clients came on board, or everything held steady for the year. Comparing your expenses by category to your budget can help you see trends in cash flow needs or when suppliers/providers may be getting too expensive.
Legal Disclaimer: This post contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information. This information was current at time of posting; we are not responsible for updating this or any blog post/article for subsequent changes in the law or its interpretation.