As a small business owner, you might be keeping an eye on and tracking your transactions, but are you monitoring and making decisions out of this information?
This article will walk you through how to easily track small business financials so that you are in control of your finances
Having the right tools will make tracking expenses less painful and as a result, you can track on a regular basis and you can keep a closer eye on your expenses
Tracking expenses helps during tax prep and likely take advantage of all tax deductions that apply
1. Open a business bank account
It is crucial to separate your personal finances from your business finances
While not all business entities are required to have a business bank account, having a separate business bank account allows you to efficiently track revenue as well as expenses
The business bank accounts you will need to open are
- Checking account
- Savings account
- Credit card
A word of caution on credit cards – while credit cards may offer rewards such as cashback on purchases, be careful how you use them and account for every purchase.
2. Keep track of your Receipts
Dealing with tons of papers can be overwhelming especially if organizing is not your top skill
Digitalizing your receipts as soon as you have them will help stay organized
Important types of receipts to keep track of are:
- Meals and entertainment – write down who attended as well as the purpose
- Business travel – write down the purpose of the business travel so that there are no questions that it could have been personal travel
- Gifts – If the gift giver is also involved as part of the gift – for example attending a concert, this would not be considered a gift but entertainment. Keep track of these details
- Home office – calculate the percent of your home used for business and use the same allocation to calculate other home-related expenses. This will also apply to vehicle-related expenses
You can utilize an online vendor to store your receipts.
Quickbooks will help not only store your receipts but also record them as transactions
Keeping track of your receipts will really pay off during tax prep – you will be running around trying to figure out your receipts
3. Choose cash or accrual accounting
Most very small businesses, freelancers, and businesses without inventory use cash accounting since it is very simple and straightforward.
With cash accounting, you simply record transactions as they occur. For example, you record income as soon as payment for your product or service is received and you record payments as they are made
With accrual-based accounting, it is a bit more complex and suitable for businesses with employees, businesses with inventory, or large businesses. You record income when a product is sold or services are completed even if payment has not been received. You record your expenses when you receive the invoice not when the payment is made
Most small businesses start with cash accounting and as they grow and get bigger, they switch to accrual-based accounting
4. Track transactions as they occur
Setting up an alert to remind you of upcoming expenses before they are due helps prevent missed payments
Online tools such as Google calendar are free and tremendously help with notifications
An alternative is online accounting software. While they cost money, they will save you a ton of time as processes are automated
Software such as Quickbooks nicely integrates with Turbo tax and when tax season comes, you will not be running around trying to be organized
You can find other online tools that can help with some research
5. Review your financial reports
Once you have tracked your expenses and categorized your receipts, the final step is to review your financial reports
Pull your financial reports regularly. In the beginning, you should review your financial reports weekly so that you are in control of your finances
Reviewing these reports will help you determine the accuracy of transaction and if anything is off and should be followed up on
Reviewing your financial reports will give you a good understanding of what it costs to run your business and how to maintain profitability
While tracking expenses can be a lot of work, it’s essential for small businesses. Doing it the right way comes in handy during tax season as your financials will be organized. In addition, you can make confident business decisions as you can review your business trends and hone in on those areas that need help.