If you run a small business, then it’s almost certain that you will be dealing with some form of expenses. This could take the form of staff wages, software, and equipment, or renting office space. But while managing your expenses is an important part of running a business, it’s all too easy to get caught up with time-consuming, daily business activities and not give your business expenses much thought. However, understanding your expenses can make a significant difference in increasing your revenue and profitability. It can also help you avoid being one of the 20% of small businesses that fail within their first two years of trading.
In this small business guide, we’ll help to demystify the world of business expenses. We’ll look at everything you need to know about managing your expenses, from what they are, how to track them effectively, and ways you can optimize expense management to make it work for you.
What are business expenses?
Business expenses are the unavoidable costs you incur from operating a business. This encompasses everything you pay monthly to keep the business going, such as salaries, rent, storage, office supplies, equipment, printing, advertising, marketing, software, utilities, commissions, bank fees, and delivery. By deducting these costs from your total revenue, you can calculate income and the business’s profit or loss.
What are deductible expenses?
Deductible expenses are business costs that can be deducted from your taxable income. This reduces the amount of income that’s subject to tax and, in turn, reduces how much tax you’ll have to pay to the IRS. A business expense that’s tax-deductible must be common for your type of business and helpful to running your type of business. Here are some examples of deductible business expenses:
- Payroll taxes
- Office supplies
- Bank charges
- Professional fees
- Professional membership fees
“Irrespective of your business’s size, it’s essential to have a good understanding of deductible business expenses and your tax obligations. Right from the start, maintaining accurate records of all your business-related expenses, including invoices and receipts is paramount. It’s a good idea to consult with a tax professional who can advise you on helping your business maximize potential tax savings,” says Damian Brychcy, COO and US MD of Capital on Tap.
How to track your business expenses
Tracking your business expenses enables you to monitor profits and losses, identify trends, and help you make more accurate forecasts. You can also plan future spending more effectively as you’ll have a better understanding of how much money you have and where it goes. To assist with thorough tracking, here are a few recommended simple steps.
Open a business account
Having an account exclusively for your business will ensure there’s a clear line between your personal and business expenses. It also makes organizing your business finances and claiming tax deductions much easier. Having a credit or debit card that’s linked to your business account makes it simpler to track business spending without having to sort through paper receipts.
Choose the right accounting software
Accounting software lets you automate your business’s financial records and track expenses. This makes organizing your business expenses much easier. The ideal accounting software will have reporting tools that give year-to-year comparisons of your expenses and let you choose your preferred reporting method.
File your business receipts
While digital is the way forward, you’ll still likely have some paper receipts, so ensure you file them as you go. The IRS requires businesses to keep all their paper receipts and relevant paperwork, such as bank statements, for a minimum of three years. Some accounting software apps and business tracker apps enable you to digitally store receipts.
Review your business expenses
Regularly reviewing them will ensure you maximize the results from tracking them. Analyze reports and identify any patterns to see how much your business spends in specific areas. This will also help you monitor any trends in your employees’ business spending. Reviewing your business expenses will help you understand your operation’s financial health for more informed decisions.
How can a small business optimize its expenses?
Optimizing your expenses can set your small business on the path toward financial stability and profitability. There are various ways you can optimize your business expenses, for example:
- Review and prioritize: Analyze expenses and prioritize which ones are essential and which can be reduced or eliminated
- Negotiate with suppliers: Approach your suppliers for more favorable payment terms, better pricing, or discounts
- Embrace technology: Take advantage of technology and automation to reduce manual tasks, streamline your operations and improve overall efficiency
- Utilize a business credit card: A business credit card can help you track business spending, identify areas to reduce costs, and leverage rewards or cashback programs
- Budget: Create a realistic budget that you regularly review and adjust according to your growth and business goals
- Tax planning: Ensure you understand tax deductions and credits to minimize your tax liabilities
- Inventory management: Regularly monitor your inventory levels to avoid excess stock and minimize costs
- Improve energy efficiency: Increase energy-saving measures such as energy-efficient lighting to reduce your business’s utility costs
- Outsourcing: Look for opportunities to outsource or collaborate with other businesses to share resources and costs.
Brychcy adds: “A business credit card that aligns with your business’s needs and offers rewards or cashback can be an effective way to optimize expenses. It also allows you to track and report expenses more efficiently. However, it’s important to use it responsibly, just as with any other type of credit card. Timely payment of the balance is crucial to steer clear of extra fees and charges.”
Whether you’ve been trading for several years or are one of the 5 million fresh businesses that launched in the US last year, getting to grips with expenses should be key for every business owner. Managing small business expenses is an ongoing process that requires regular reviewing, analysis, and recalibration. With effective control over your business expenses, you can optimize your business’s cash flow and economic position for a financially healthy future.