Yawn. Entrepreneurs aren’t out there launching businesses just to experience the thrill of tracking their expenses, but proper expense tracking is a critical aspect of startups! As an entrepreneur, you strive to bring your vision to life and create something worthy of being proud of. However, running a business is more than just being creative and having a vision. In order to experience long-term entrepreneurial success, you need to be paying close attention to the financial details, including proper expense tracking.
How Does Tracking My Expenses Help Me With My Startup?
Proper Expense Tracking Helps You Stay On Budget.
When you are just starting out, each penny spent and earned holds a higher value than it might while well-established. When you are carefully tracking expenses, you are able to make informed and rapid decisions about your business’s finances and operations. This ensures you can keep your business financially healthy and costs under control during the roller coaster that is business ownership.
Capture Future Benefits
Many startups find themselves paying for expenses with personal cards and accounts or making frequent cash transfers as they deal with the challenges of cash flow. It is easy to lose track of expenses passed through personal accounts, but by capturing these properly you can capture future benefits such as changes in equity and tax deductions. Imagine making a few purchases for your business with personal cash. If you fail to capture this expense for your startup, it will not be reflected in the expenses in your P&L and therefore will not reduce your startups tax burden. Even if you are set for a year one loss, in many cases your loss can be brought forward and levied against future profits or reduce your own personal income tax obligations.
Helps You Identify Areas For Improvement
By tracking your expenses accurately, you can see in real time where your cash flow is going and can identify areas where you may potentially cut costs. Identifying areas where you could reduce expenses quickly will make your business more efficient in the long run as the saved funds become available for reallocation. In the excitement and frustration common to a startup, knowing where you need to focus early can be the difference between success and failure. Professional bookkeeping services can help in identifying opportunities or issues that could impact the financial health of your business.
Prepares You For Tax Season
Even if your startup is unlikely to make profits for several years, you will still have to ensure you are filing your returns correctly and on time to avoid interest and penalties. Many deductions can be spread out to reduce your tax burden in future years, and depending on your entity type a loss might help you reduce your personal tax burden and free up additional cash for investment. Failure to complete taxes on time can add a large amount of avoidable expenses. At the time of writing this article, the IRS charges partnerships $220 per month… per partner for late returns (IRS).
Tips For Proper Expense Tracking
The proper tracking of expenses has gotten relatively easy over the years, with a myriad of software and a strong literature of recommended processes to simplify the task at hand. What level of software or training you need to manage your business’s expenses will vary depending on your industry. Here are some tips for general proper expense tracking:
Keep Detailed Records
The key to proper expense tracking is keeping detailed records. Simple right? In the modern world, there are so many ways to pay for products and services, which has added a real challenge to tracking expenses. Make sure to save each receipt and invoice, as well as record every expense in a spreadsheet or accounting software. Excel may feel archaic to modern entrepreneurs, but our accounting firm still sees a huge amount of value every day from our Excel templates. Be sure to include details like the date, amount, and the purpose of each expense.
Categorize Your Expenses
Organizing expenses into categories can help you identify areas where you may be over-committing and pivot when necessary. Software expenses are increasing month over month? Dive in to see if you are replicating subscriptions, paying two services to do the job of one. Advertising doubles between February and March? Did we launch new ads? Did we see any increase in sales? Some common expense categories include office supplies, rent/mortgage, marketing & advertising, and payroll.
Leverage Accounting Software
Using accounting software can make expense tracking much easier and far more time-efficient. There is a ton of accounting software out there, many with their own specializations and strengths. Consider a free option like Wave if your transactions are simple and you do not need complex integrations and reporting. Another popular more advanced option is QuickBooks, which we see most of our clients using. Accounting software helps to automate many of the tedious tasks associated with proper expense tracking and many even link directly to your bank accounts and credit cards.
Consider Hiring A Pro
Many startups do not feel like they have enough money for it to be worth hiring a professional accountant or bookkeeper, but for some, it’s too risky a step to avoid. If you are comfortable with your own accounting processes and have simple books, it may be simpler to grind through the work on your own. However, often new businesses spend a lot of money from many sources on complicated or big-ticket items, and improper accounting can really come back to haunt you. Besides, a professional accountant or bookkeeper can ensure that your finances are accurate and up-to-date while providing valuable insight into your business’s financial health. If such a professional could be of value to you, reach out to Vertices and schedule a consultation.
Conclusion
Proper expense tracking is not the most glamorous aspect of your new business, but it is essential for long-term success. By keeping careful records, making decisions based on actual finances, and identifying areas for improvement early, you can ensure that your company stays fiscally healthy and thrives for years to come. So, take the time now to establish solid expense-tracking processes and watch your business grow!
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