Just as the words ‘returns’, ‘profits’, and ‘tax deductible’ sound like music to an entrepreneur’s ears, the words ‘losses’, ‘debt’, and ‘liability’ leave a sour taste in their mouth. And if we were to boil these unsavoury terms down to a single word of origin, that word would be ‘expenses.’ When business expenses spiral out of control, your business takes a turn for the worse. Most entrepreneurs misunderstand managing expenses as cost-cutting.
However, seasoned business magnates know that business efficiency is not just about managing expenses but also about having the right attitude and approach to expenses. They view expenses as a strategic opportunity to take the business to the next level. To get that approach, you need to record business expenses with a strategic focus.
How to Create a System to Report Business Expenses
Recording business expenses tells you exactly how and where you have spent your money, so that you can control, channelize, and optimize this spending to support business growth, rather than deplete your financial resources. Setting up a business expense reporting system can automate this cumbersome process and turn these expenses into valuable insights. Here are a few steps to get you started.
Open a Separate Bank Account for Business Transactions
Many startups or small businesses often make the mistake of using their personal bank accounts for business purposes. Their rationale is: “Why incur additional bank charges when the business is yet to gain pace?” And while this logic may sound feasible at first, it becomes a burden to separate business transactions from personal ones as your business grows.
Maintaining separate bank accounts right from the beginning is a better option. In fact, having separate credit cards or corporate cards also makes bookkeeping and accounting much easier. Each business payment is documented, making the reconciliation process smoother and filing taxes simpler.
Choose the Right Accounting Method
There are two main accounting methods, cash accounting and accrual accounting. While cash accounting records expenses only when the actual payment is made, accrual accounting records the expense when incurred, regardless of whether the cash has been received. Each method has its advantages, and it is up to you to select the one that suits your business needs. If you are a farmer, cash accounting would probably make sense for you. But if you are a manufacturer and need to keep an inventory, the accrual method would be more suitable. Ensure your accounting method aligns with tax laws. Discussing with an experienced professional which method works best for your line of business can help you make an informed decision.
Use Tools to Manage Business Expenses
Gone are the days of bulky ledgers and spreadsheets that had ample scope for manual errors. Automated software can be customized to suit your specific business needs. These tools enable you and your employees to record, categorize, and store every expense in real time, reducing errors and improving efficiency. Moreover, when all business expenses are recorded on a single platform, it reduces the risk of fraudulent transactions.
A great way to control business expenses is to issue corporate cards with predefined spend limits to your staff. For any transactions above the specified limit, you can set a requirement of senior approval. You can also restrict approvals and card usage to specific vendors or categories to avoid unauthorized purchases and control spending. For instance, a specific card could be for food and one for travel bookings.
Organize and Keep Receipts and Invoices
Whether it’s a meal for a customer, a gas refill for the company vehicle on a business trip, or a purchase of raw materials for your business, every business expense must be supported by evidence in the form of a bill, invoice, or receipt. However, large volumes of transactions sometimes make it difficult to collect and store receipts and bills. And every lost or misplaced document could mean a missed tax deduction or an impending penalty.
You can integrate digital record-keeping software with your business expense management system. Such software enables you to take a photograph of any receipt or bill as soon as you have it in hand, which then captures the document’s details, categorizes them, and records them per your pre-specified bookkeeping guidelines. Moreover, it also creates a backup using a cloud-based storage system, ensuring you never lose such a vital document come tax season.
Linking your business bank account to this software can further improve efficiency, as the software can reconcile transactions with bank entries. Training your employees and helping them understand how using such software can ultimately reduce their year-end workload can be a huge stressbuster during tax season.
Categorize Business Expenses
Categorizing your business expenses might seem like an added burden to some, but their importance is realized during taxation, when certain expense categories are eligible for deductions and tax credits.
Categorizing expenses also helps you understand your spending patterns and identify areas of overspending or underspending. For instance, it is only when you categorize all expenses properly that you may notice that your overhead costs are bloating, or that your marketing spend could do with a little more funding to attract more customers. It is these small things that play a strategic role in accurately channelizing your business funds and helping you bring in more business.
Review and Analyze Expenses Regularly
Recording and categorizing expenses can only help you meet CRA compliance requirements. But transforming ordinary receipts or bills into useful, actionable data and insights requires regular monitoring and analysis. A monthly or quarterly review of your business expenses helps you identify spending patterns, which in turn alert you to wasteful spending or potential fraud. Analyzing and reviewing the expense report’s categories can help you create a more practical budget and give you leverage when negotiating with vendors and suppliers. If your inventory costs are too high, maybe it’s time to re-evaluate your inventory needs and either reduce storage space or negotiate for cheaper rent. Unused subscriptions, failed publicity campaigns, or high-priced vendor relationships can be revisited and reviewed to help cut costs and optimize financial resources.
Being in control of how and where you spend helps you make better budgets, revise your price structure accordingly, optimize your current funds, and earn more returns with less spending.
Contact Glenn Graydon Wright LLP in Oakville to Help You with Business Expense Reporting
Talk to a bookkeeper and discuss your recordkeeping requirements. At Glenn Graydon Wright LLP, our accountants and bookkeepers can help you chart out a workflow and set a system in place to record business expenses, categorize them in a tax-compliant manner, and convert your expenses into insights and tax savings instruments. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting and bookkeeping expertise, contact us at 905-845-6633 or connect with us online.