Excellent financial management is at the heart of every small business; without it even the most profitable companies are at risk of failure. According to the US Census Bureau, last year more than 5 million new small businesses were launched in the US.
However, only 22% of new small businesses and startups survive their first year. This isn’t necessarily due to low-quality services or products; often it is a simple case of lack of cash.
Running a small business requires making important financial decisions all the time, which is why having a thorough understanding of managing your business expenses, and having the right tools and resources to be able to do that, is crucial.
To help you navigate this, here’s a complete guide to managing small business expenses.
What Are Business Expenses?
Business expenses are costs that are incurred when running a business. This includes salaries, rent, bills, costs of inventory and stock, advertising, operating costs and more. These can be broadly broken down into three main types of expenses.
Operating expenses. These are short-term expenses that a business incurs on a day-to-day basis.
Generally, expenses in this category fall into a) Selling, General, and Administrative expenses, such as bills, traveling expenses, advertising and marketing spend, and healthcare insurance, and b) Cost of Sales or Goods, that are directly related to a business’ production or output, such as labor, material, storage or shipping costs.
Non-operating expenses. These are costs that are not essential to the day-to-day running of your business, but are incurred when necessary. These include interest charges and legal expenses for example.
Capital expenses. These are costs mainly incurred when a small business embarks on a new project or invests in increasing output or profit, for example in land, machinery, buildings, or office equipment.
The Importance Of Managing Your Business Expenses
When handled effectively, properly managing your small business expenses can have a host of benefits. These include:
Increasing visibility: Establishing processes for tracking expenses across your company enables small business owners to have full oversight of all company expenditures in comprehensive detail.
This is invaluable when it comes to reporting and developing strategy and enables business owners to more easily assess where expenses can be reduced to improve cash flow.
More control: According to the GBTA, on average, 19% of submitted expense reports have errors that cost the business.
Using tools and technologies that keep track of employee spending and expenses automatically gives small business owners tighter control over where their employees are expensing costs, and what the money is being spent on.
Boosting productivity: Implementing efficient tools and resources to manage your business expenses saves time when it comes to manually processing expense reports and receipts. Managing your business expenses efficiently will increase productivity, save time, and cut costs.
Tax savings: Many small business expenses are tax-deductible, and can therefore significantly reduce a business’s taxable income. By managing and tracking all expenses meticulously, evidence is readily available when claiming tax deductions, and simplifies tax returns.
Better financial planning: Having full oversight of all expenses, which are kept up-to-date means that small business owners can easily spot trends or problems like overspending or fraud.
This means that business strategy and future planning can be achieved more efficiently and in line with expenses and running costs in mind.
Better organization: Accurate financial statements and bookkeeping means that small businesses are ready for audits, applying for loans, applying for business bank accounts and credit cards, and tax season.
David Luck, co-founder and CEO of Capital On Tap, says: “Cash flow is the top focus for any business, so it pays off to keep finances across the board organized and up to date. Expenses are an important part of that. Make sure you keep all personal and business expenses separate and pay careful attention to where your expenses go, and on what.
“Doing this puts your business in a strong position when it comes to applying for financial aid, applying for a business credit card, and when it comes to tax season. Every penny counts, so keep track of your expenses to ensure your business thrives.”
Tips For Managing Small Business Expenses
So, what steps can be taken by small business owners when it comes to managing their company’s finances and expenditures? There are several ways this can be achieved as outlined below.
Open a business bank account. There are a number of reasons why keeping business income and personal finances separate is important.
Having a separate business bank account means that your business-related expenses are crystal clear, and saves small business owners from manually going through personal bank statements to differentiate between personal and business expenses. Use your business accounts for all business purchases.
Get a dedicated business credit card.
Using a business credit card means that all your business expenses are on one statement to streamline your accounting processes. Business credit cards have a host of other benefits for small business owners too including greater flexibility and convenience, tighter control over employee spending,
Using a business credit card means that all your business expenses are on one statement to streamline your accounting processes. Business credit cards have a host of other benefits for small business owners too including greater flexibility and convenience, tighter control over employee spending, and a range of rewards, perks, and sign-up bonuses.
Record all expenses and transactions. Decide whether you are going to record transactions by hand using a custom spreadsheet, or on a digital spreadsheet.
Create a detailed spreadsheet that carefully tracks every expense and categorizes it, and ensure that this is kept meticulously up to date so that every pound is accounted for.
Invest in accounting software. Switching from manual accounting and expense-tracking to automated software will make managing expenses quicker and easier, in turn saving time and money.
Accounting software does all the calculations for you and keeps all company financial information up to date by automatically keeping track of all expenses, simplifying the process enormously.
Generate accurate, regular financial statements. Accurate financial reporting and statements, whether they are monthly, quarterly, or yearly, is crucial when it comes to managing small business expenses, as it gives small business owners a transparent overview of the company’s financial health.
Expenses are a critical part of income and cash flow statements and analyzing expenses incurred, and how they contribute to profit or loss is vital to business strategy. Additionally, accurate financial statements will ensure your business pays the right amount of tax.
“It’s essential to track where money is being spent, especially if you have lots of expenses coming out every month. Ensuring that you can track all expenditure and up-to-date business costs at a glance and in detail, helps small business owners have better oversight of where costs can be cut, or where more budget can be allocated,” says David Luck, co-founder and CEO of Capital on Tap.
Small businesses that manage business expenses efficiently reap the benefits. From saving money, cutting costs, ensuring you pay the right amount of tax, identifying cost savings, to greater accuracy and improving cash flow, effectively managing expenses is critical for small business’s financial health.
Small business owners with a good grasp of their company’s expenses can make better financial decisions for the future, gain tax deductions, and make it easier to apply for loans, financial aid and lines of credit. All of these can be essential to business growth.
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