Understanding your business expenses can be the difference between drowning and growing your business. On the surface, understanding how much your business spends sounds like an easy task. But it’s proven to be a pitfall for many.
Keeping a tight ship on your business expenses is crucial because it determines your taxable net income. Without proper expense documentation and tracking, your business could be bleeding money by paying taxes on funds that shouldn’t be taxed. That’s why most businesses are turning to expense management software to keep a firm grip on their expenses.
What is a Business Expense?
Let’s start with the bare basics. A business expense is what it costs to run your business. These production costs apply to both small and large businesses but vary depending on the type of business.
Keeping track of your business expenses is crucial for the calculation of your taxable net income. Taxable net income is a result of your business’s collected revenue minus the expenses.
Types of business expenses
There are various types of expenses. Classifying the types allows for easier tracking, especially considering that some of the costs are not planned.
- Fixed expenses – Most businesses have a firm grasp of their fixed costs because they are critical to the day-to-day operations and the larger financial goals. These include payments for licenses, insurances, tenancy, utility bills, and employee wages.
- Recurrent bills – These are less predictable than fixed expenses but occur regularly. Though regular, recurrent bills don’t necessarily occur on the same dates or for the same amounts. Depending on your business, they could include advertising and branding costs, employee training, legal fees, employee programs, petty cash, and maintenance.
- Non-recurring expenses – Non-recurring expenses and be the most difficult to keep track of without proper procedures and systems in place. They only happen once or a couple of times in your business year. Though substantial, some are not significant and will easily pass under the radar. Repairs, purchase of office furniture, among others, all fall under this class.
- Unexpected expenses – Gifts to clients, staff parties, meals, travel are all unexpected expenses. These are sudden, non-recurrent expenses that you haven’t budgeted for.
In addition to these four types of expenses, depreciation and other indirect costs are all expenses. It’s easy to flood a business with debt as the costs outweigh the revenue. From this perspective, it’s easy to see why businesses must keep track of their costs.
SMBs are the most susceptible to expense mishaps. Without proper tracking and recording, SMBs can incur penalties for non-compliance and are often subjected to audits for not recording business expenses correctly.
How to Track Business Expenses Accurately
There’s no doubt that keeping track of business expenses can be a handful. Especially when you don’t have the proper systems and policies in place, but you can refine, fine-tune, and make the process more efficient by implementing these handy tips:
Prepare a comprehensive travel and expense policy
Without a comprehensive travel and expense policy, the business is open to manipulation from its employees. Employees present fake receipts with exaggerated prices or non-existent expenses. Even businesses with a travel and expense policy in place should consider giving it a second look and plugging potential loopholes.
A travel and expense policy clarifies any gray areas on reimbursement of expenses. A well-rounded policy should outline the travel expense categories clearly and in detail and also addresses other areas that include travel advances, local transport, corporate credit card expenses, air travel, insurance and medical expenses, cash advances, hotel bookings, and other daily expenses.
Ultimately, the policy sets guidelines and conditions for employees to limit and record expenses while traveling.
Create an easy to understand expense report template
An itemized expense report template can ease tracking expenses and make it easier to get organized for taxes in time. However, the template has to be easy enough for the employees to use. Some of the most important details to have in the expense report template include:
- The date of purchase
- The vendor
- The client (In cases where an item was purchased for a client)
- The project (for project-related purchases)
- Author (who purchased the item)
- Amount spent
- Notes (for clarification)
These are some of the common fields found in expense report templates. But, you can customize your company’s expense report as per the requirements of your business.
Digitize expense management
Thanks to technology, and in particular expense management systems, you don’t have to drown in a sea of paper receipts and expense documents. With the proper tools, apps, and software, you can digitize all your expense reports in four simple steps:
- Digitization – Not only is this a more comfortable and more manageable approach, but the IRS also accepts scanned receipts for tax write-offs and started doing so as far back as 1997. You can scan all your expense receipts, invoices, and other documents and do away with paper copies. You should also choose the right expense management software.
- Integration – It’s important to choose a management expense system that can work with your current system. This saves you expensive and unnecessary overhauls and limits the learning curve. The system should work with any Human Resource Information Systems, accounting systems, or Enterprise Resource Planning systems that you have in place.
- Automation – Automation makes the entire process of tracking business expenses smooth and as hand-free as possible. A good expense management software should be adaptable and allow you to set rules specific to your business and approval process depending on the type of expense and other related variables.
- Compliance – The expense management and reimbursement policies vary from country to country. As such, it’s vital to opt for a system that is compliant with the financial regulations in your area of operation. In addition to legal challenges, you also have to consider privacy, language, and storage requirements when opting for expense management software, especially for large, multinational enterprises.
Why is Expense Management Software Important for Businesses?
There are numerous benefits associated with switching to expense management software. Some of these are:
- Easier tracking of expenses
- Quick employee expense reimbursements
- Real-time insight into the financial health of the business
- Continuous compliance and audit readiness
- Increased employee satisfaction
Most businesses fail because of underestimating the essence of meeting and paying business expenses. Proper bookkeeping, comprehensive travel and expense policies, and investing in the right expense management software all go a long in easing the process of tracking expenses and monitoring business growth.
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