Small businesses need to keep tight control of operating costs to maximise cash flow and profits. If you want to retain money in your business, you need to know where you’re spending and how much. One of the most effective ways to do this is by categorising your small business expenses which will give you greater insight into your profits and losses.
You can categorise your expenses for small business by developing a list of popular headers that each charge can be assigned to. Categorising expenses will be helpful in keeping your company organised, for budgeting purposes as well as in assessing which expenses can be written off at tax time.
Educating yourself about the common small business expense categories will make it much easier to determine what is and isn’t deductible at tax time. Some of the most common expense categories include utilities, travel, salaries and other wages, and rental expense, but there are many more that you should be aware of.
The right categories for a small business will vary depending on the needs of the business owner. For example, a property management business may have dedicated categories for different types of maintenance and repair, while a leasing business may categorise according to the equipment they rent out. You should choose categories depending on how easy they make it to manage your business financially.
Most accounting software like QuickBooks, Xero, or Freshbooks will come with business categories already in place, and you will be able to add or amend them as needed.
The easiest way to stay on top of business finances is to reconcile your bank statements against your accounting software. This is the essence of bookkeeping, and it’s a good habit to review your transactions on a regular basis.
Accurate records are essential to getting your categories right. When you go through your bank transactions, get the details of any spending, and assign it to a business category in your accounting software.
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Here’s a list of business categories that you can assign spending to. This list is not exhaustive—the names used in your accounting software may be different—but it will give you a good starting point.
If you pay a salary or run payroll for your business, you’ll need to categorise whenever you make a payment to employees. You should also categorise payroll taxes and other deductions on your salary costs.
If your business provides you with health insurance and pays premiums on your behalf, be sure to categorise them appropriately.
Use this category for making payments into a business retirement plan, like a 401(K).
You might pay towards certain other employee benefits. If this is the case, you should categorise those expenses.
Payments made towards your office lease, rental, or purchase expenses. This might be a separate office, the money you expense as a home office deduction, interest on your mortgage payments, or something else.
Money that you spend on bills like electricity, gas, water, or trash collection. If you work from home, you can deduct a percentage of your household bills depending on how much of your home is used for business.
Use this category for your mobile and landline expenses. You should also include fees for broadband and other money you pay to get online.
Include the costs of desks, filing cabinets, chairs, and other money you spend on office furniture.
You can categorise expenses on computers, laptops, mobile phones, printers, and other equipment you use in the course of work.
This is a “catch-all” category for those miscellaneous office costs like postage, copier paper or toner cartridges, stationery, and similar expenses.
You can expense money you spend to keep your workplace in good order. This might include repainting, replacing light bulbs, cleaning, repairing equipment, and other similar expenses.
If you use a vehicle to help run your business, you should categorise it as a separate expense. This can include fuel, maintenance, repairs, and other necessary automobile costs.
If you travel for business, and you haven’t categorised your spending elsewhere, you can include it here. This might cover airfares, travel by train, or similar expenses.
If you stay away for a business, you can categorise the money you spend on hotels or other accommodations.
If you attend conferences and seminars for your business, you can categorise those costs here.
If you pay money to an accountant, lawyer, or other professional, include them here. You might also include membership fees for professional associations or publications.
You can categorise money you spend to market and promote your business. Use this for online and offline advertising, sponsorships, public relations, and similar fees.
Your bank is likely to charge fees for receiving payments from customers. If you take credit or debit cards, you’ll pay a fee to a card provider or a payment portal like PayPal or Stripe.
If you pay for software like MS Office, Adobe Creative Suite, or other applications, you can categorise them as an expense. You can also include fees charged for other “Software as a Service” tools, web hosting, and similar costs.
You can categorise the premiums you pay for general liability, professional indemnity, and other types of insurance here.
Think of the supplies you buy for your business and the bills you pay. If you have employees, you have their salaries to pay and employer tax deposits to make. Some of your expenses could be daily, others weekly, and still others monthly. You also have quarterly bills like tax deposits, and annual expenses, which can include business insurance and bonding.
How do you decide how to set up small business expense categories? Most of us know how to balance a cheque book, but far fewer people know how to prepare a financial statement. Deciding how to categorise expenses for small business operations will help you understand how much you’ll owe in business taxes at the end of the year. It can also help you manage your business and plan for the future.
First, you should categorise your business expenses based on what you spend and what you spend it on. Then, you should decide which ones fit in your small business tax expense categories. You can use small business accounting programs to do this, and most of them help you to determine how to decide when you set the programs up.
Categorising business expenses will help you at tax time. It will also help you to manage your business, especially determining performance metrics. If you’ve ever seen a restaurant makeover or business rescue show, you’ve witnessed business owners who often don’t know important financial performance metrics for their business, like how much it costs to put a meal on the table for customers.
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Sometimes small businesses that get in financial trouble don’t know the basics they need to make day-to-day or longer-term financial choices. Restaurant owners may not know how much it costs them to open the doors of their restaurant each day. A business that manufactures cosmetics might not know how much it costs them to make and ship various products.
One way managers refer to these basic cost figures is “financial performance metrics.” Categorising business expenses in a way that makes sense to you will let you identify the performance metrics that are important for your business. Once you’ve identified the expense categories that contribute most to your performance metrics, you can make changes to achieve and improve your financial performance.
One business metric that every business that sells things should know is Cost of Goods Sold (COGS). Businesses that provide services have a Cost of Service (COS) metric. Another key metric is the profit margin. No matter whether your business sells goods or provides services, you should also know your gross and net profit margins.
Your gross profit margin is the basic amount of profit you make after you pay all of your expenses. The net profit margin is the amount of money you have leftover after you pay taxes.
Without a solid expense tracking and accounting system, the potential for missed tax deductions and overspending is high. These missteps lead to cash flow issues, one of the most common causes of a business closure. Fortunately, clear business expense categories help you avoid this.
You can track, manage, and categorise your spending some ways, and even use different financial tools in combination. Here are some of the most convenient options.
Setting up a small business comes with a lot of expense. To keep these costs organised and under control, you’ll want not only to keep a total of your expenditures, but you’ll also want to group them by type. Startup business costs typically fall under one of two categories: recurring expenses and one-time expenses.
Generally, your one-time expenses are those you used to start your business, such as for permits, furniture, equipment, licenses, and fees. Your recurring expenses, on the other hand, are those you are probably going to be paying monthly, such as rent, utilities, and employee salaries.
Now that you’ve identified your startup business costs, you can put them into more specific categories. This will help you budget and take advantage of as many tax deductions as possible.
Take this extensive list of business expenses and find out which ones you can deduct for tax purposes. Claiming deductions can save you and your company significant money. It reduces your taxable income and allows you to pay less in taxes. An accurate tally of total expenditures that can be deducted from business revenue helps you determine your taxable income.
Some business expenses you can deduct fully and some only partially. Fortunately, you can deduct many of the expenses listed above in full. However, some expenses can never be deducted. For example, you can’t write off any personal expenses, such as interest paid on a personal credit card and mileage driven for taking kids to school, as business expenses.
Now that you know the types of expenses your business incurs, you need to create a system to keep track of them. You can, for instance, organise your income and expenses into an easily updated computer spreadsheet. Simply create a file for each month listing your expenses and categorising them by their department. This spreadsheet can also help you with budgeting if you choose to list your income, as well.
At the end of the calendar year, add columns for budgeted, total, average, and projected expenses. In the budgeted columns, plug in what you had budgeted for each expense. In the total column, list what your expenses actually were for the year. Next, you can add your average monthly expenses to the average column. Now multiply your average monthly expenses by 12 to determine your projected expenses at your business’s current position.
Keep backup records of all of your invoices, bills, receipts, and statements. If your company gets audited, the IRS asks any questions for tax purposes, or a system malfunctions, you can support your spreadsheet information with hard copies.
But before you file away a receipt, note somewhere how that expenditure relates to your business. This way, if you need to check it in the future, you will know what purpose the items on the receipt served your business. If the items on the receipt include a mix of both personal and business items, highlight the ones that were for your business. Take this smart organisational step for both physical receipts and those saved electronically.
Clear-cut business expense categories and tax deductions go hand in hand. At the end of the tax year, organised expenses save businesses significant time on tax filing and improve your chances of saving money.
Furthermore, if you’re pitching to investors, applying for credit, or creating financial projections, you’ll also need an accurate estimate of your regular business expenses, all properly organised.
As you can see, effective expense management has an outsize impact on your business. Between accounting software, receipt tracking apps, and all-in-one credit accounts, there are ample tools to simplify each step. If you have questions along the way, it’s always best to ask your CPA or tax advisor.
In conclusion, organising and tracking expenses for small business can be a tedious job at first. However, if you start organising these expenses from the very start of your business, they’ll be less likely to cause you headaches later on. Begin by examining what expenses you had to get your company up and running. Then add to your business expenses and the complexity of your tracking system as your company grows. If your company grows to the point that you can no longer handle expense tracking yourself, it might be time to hire accounting help.
Once you have a system in place to organise your expenses, all you have to do is keep updating it with current information. When it is time to file your taxes or undergo a tax audit, you won’t have to scramble to come up with an accurate total and documentation of your company’s business expenses. You can also use the system you have in place for organising your business expenses for budgeting your own expenses. With a good, consistent system in place, you’ll have a well-organised and easy-to-access list of small business expenses.
Guest post by : Anna Eydlish Form -
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