Starting a business is no easy task. When you’ve got a product or service that you are passionate about, your focus is directed on how to offer and promote it to the public. You’re likely dealing with rent, utilities, personnel, management, infrastructure, equipment, supplies, furniture, product, branding, advertising, etc, etc… When so many important things require your immediate attention to even get your start-up off the ground, some of the less obvious challenges in running a business tend to be initially overlooked.
One such challenge is how to properly handle business expenses. Let’s be honest – did that thought even cross your mind? Chances are that even if it did, it was way in the back. Well, what about at the end of the year when looking over the books? It sure becomes readily apparent that you need a clear system when you’re staring down a disorganized mountain of receipts. Instead, start off on the right track with these important tips for handling your small business expenses.
1. Use your accounting system
It all starts here. Unless you’re planning to run your operation using quill and ledger like you’re in a Charles Dickens novel, there’s no reason not to get one of the many available accounting programs to track your finances. Even though it may seem simple enough to just use a spreadsheet at first to track your expenses, you’ll soon discover that making heads or tails of everything becomes nigh impossible. To keep all your transactions knit and clear, claim your tax deductions, audit your own finances at any time, and save on hours required to do quarter and year-end reports – start using your accounting system right away.
2. Connect corporate credit and debit cards to the accounting system
It’s pretty simple to get the details of any business card transaction into your accounting system as soon as it appears on your statement. Sure, you can do it later – but not all financial institutions will provide you with transactions older than 3 months… and you do not want to lose any information associated with business expenses. By tracking your credit card feeds immediately, you avoid having to figure out months down the road what certain charges are all about.
3. Differentiate between Out-of-Pocket and Company Paid expenses
Surprisingly, one of the most common mistakes a small business makes is mixing up these two types of expenses. The difference is pretty simple. Out-of-pocket expenses are literally paid out of your pocket; you spend your own money (cash, debit, credit) on a business expense, so you need to be reimbursed for it. Company paid expenses are bought with corporate funds (check, petty cash, credit) and need to be recorded as such.
4. Set up expense categories
Did you know that not all expenses are treated and filed the same way? Some may be fully deductible and some only up to 50%. And each of them should be “reasonable” – which is a euphemism for “industry average”. That’s why it’s important to itemize all your expenses into different categories from the very beginning: supplies, meals, transportation, hotel, phone, etc.
5. Manage your receipts
Without proof of purchase, it can be an extremely tough time if your business is ever audited. So along with the credit and debit card transactions, you will be required to keep any and all receipts associated with your business expenses. But even if you manage to hang on to every scrap of paper, over time they will fade, tire, tear and discolor. If you can’t even tell what the receipt was for, it’s useless. Instead, just take a picture of the receipt and recycle the original. You’ve got the security of a digital copy and you’re even thinking green.
With these few things in mind, you can see how simple it is to start your business’s finances off on the right foot. Organization is simple, yet so very important to prevent chaos down the road. Taking those first few steps into the world of entrepreneurship may seem daunting – but with the right game plan and the proper attitude, you’ll be off and running in no time. And then there’s no telling how far you’ll go.