How to keep track of your business expenses

It is easy to lose track of your business expenses, especially as running your own business comes with a countless number of tasks and priorities which can be seen to be placed above keeping track of your receipts! However, when done right, managing business expenses should be an effortless activity that allows you to not only be more efficient but also gives you a clear idea as to how your business is performing- something that clearly has never been so important as it is today. There are a number of benefits to staying on top of your expenses, and we have listed some of the key selling points below:

Better budgeting/cash flow management  

Poor cash flow management has frequently been listed as one of the main reasons why small businesses do not survive! Having a business budget forms a key part of the strategy used to stop this from happening, but this alone is not enough. You also need to understand how your money is currently being spent and be able to compare this to your budget, so that you (or your accountant) can then establish how your spending habit needs to change to keep sufficient cash within the business.

Better decision making  

Before making important decisions, for instance whether to invest in additional equipment or whether it is beneficial to switch suppliers, it is likely that you will need to analyse your records and financial statements to make sure that you have all of the information to make an informed choice. It is therefore essential that these are as accurate as possible; without having an understanding of how your business is spending it’s hard earned capital, it is nearly impossible to make well considered and thought out business decisions.

Paying the correct amount of tax

Depending on many factors, for example the industry your business operates in and/or your trading status, some business expenses are allowable and can be claimed against your income, whilst others cannot. Being organised with your business’ expenditure means that you do not miss out on claiming all of the valuable tax-deductible expenses that will help you pay the right amount of tax, whilst at the same time minimising the time and effort spent on completing your tax returns.

Spend more efficiently

Without understanding how and what your business spends it money on, it is significantly more difficult to establish whether your business is splashing out on unnecessary or non-valuable expenditure, let alone whether there are cheaper or more intelligent ways of actually paying for the expense in question. By keeping up to date records, it is far easier to spot the wild array of inefficiencies that may be rearing their head in your business! This could range from anywhere between suffering multiple direct debit payments for the same insurance cover, to having idle cash sat in the business and not taking advantage of paying for an expense as a lump sum payment, instead spreading the cost over a monthly basis at an increased premium to your business.

How to keep track of your business expenses

Given the benefits outlined above, it goes without saying then that every business should have a good system to track and categorise expenses. If, however, you are not well versed in running a business, this could all feel rather daunting- with many business owners left thinking ‘where do I even start?’. It is worth stressing at this point that not only is every business itself different, but every business owner will operate and think differently, and so it should be recognised that there is no ‘one size fits all’ approach! It is important that you choose the system that best fit you and your business, in order to achieve the best possible result. Below are some of our tips on how to manage your business expenses:

Have a separate business bank account

Regardless of whether you trade as a sole-trader, partnership, or limited company, we would strongly recommend that your business has at least one dedicated bank account for your business (though there is also much to be said about having separate bank accounts for both tax and VAT savings so that you can clearly see what is your money, versus that is which owed to HMRC). Not only does this allow you to clearly see all of the cash flows in and out of your business, it also forms a clear line in the sand between your business’ finance and your household finances. This will help you to establish a much clearer, precise overview of how much cash you have available in your business, thereby allowing you to identify cash flow issues before they cause you serious damage.

In the same light, you could also explore the benefits of having a dedicated credit card for the business to further improve cash flows. However, you also need to be aware of the potential drawbacks of having a credit card, for example any potential credit card fees as well as any impact on both your personal and business credit rating.

Review and categorise expenses on a regular basis

With all of your business expenses in a separate business bank account, the next step is reviewing and grouping these into groups based on the nature of the expenses (for example, travelling, subsistence and research). This can be done using a spreadsheet or an accounting software package (see below), and is vital for identifying which expenses are tax deductible. Consistency is key – the more regularly you do this, the more your future self will thank you! A head in the sand approach with a mentality of ‘I’ll do this closer to the deadline’ causes issues for all parties involved in a huge number of ways, and has a significantly negative impact on your business.

Retain and reference receipts

Record keeping is incredibly important not only for the reasons listed above, but also because this is fully expected from every business by HMRC- they expect that a receipt/proof of purchase is retained for any and all business expenditure. Therefore, you need to make sure that all relevant receipts for business expenses are retained for a minimum of 7 years, being the window of time that HMRC have (in most cases) to investigate your affairs, and can be fully reconciled to your financial records. One way to do this is assigning matching reference numbers to your receipts and the relevant transactions in your spreadsheet or accounting software. These references should be consistent, so as to ensure that at any point you (or your accountant, or HMRC for that matter) can clearly understand your records.

If you have a large quantity of paper receipts, it may be a good idea to digitise them – this can be done simply by taking photos of your receipts, or scanning them with a receipt-scanning app. Not only does this make it easier to identify and reference receipts, but you also have the advantage of being able to maintain backup data, for example using cloud-based storage services such as Dropbox and Google Drive.

Use an accounting software package

If you decide that having an Excel spreadsheet is not for you, a more appropriate solution may be to enlist the use of a cloud-based accounting program. These purpose-built platforms, such as Sage Cloud, QuickBooks and Xero just to name a few, enable you to categorise transactions with ease, and also attach any digital receipt to the transactions recorded on such systems. Many of these accounting platforms now also come with the ability to connect to your business bank account, meaning that transactions going through your business bank account are directly imported into the software, and in some case can also be automatically categorised by the system. Such time-saving features can reduce time spent on tracking expenses, and allow you to instead invest more time in running your business.

Hopefully our tips and advice provided above has given you a good understanding of what can and should be done with regards to organising your business expenses, and the benefits to your business in doing so. If you do feel that you’d benefit from having a chat in more detail about any aspect of this post, please do just get in touch with one of the team who’d be happy to help.