It’s easier than ever for small business owners to lose track of finances and expenses today. Because pretty much everything is digital these days, you may take for granted that you have it all at your fingertips. But before you know it, the money in your accounts is dwindling, and your clients are behind in getting you paid. Now, you’re wondering how to keep better track of your finances so you don’t end up here again.
When your expenses and income are organized, the financial health of your business is easier to monitor. You can make projections and then measure whether you met them. It will also be easier to tell what went wrong when something inevitably does. That’s just the nature of business. Even better, you’ll be in better shape to figure out how to cut expenses or bring in more income in the future so your business can grow.
1. Use Software to Your Advantage
One of the first steps to track your business expenses is using software to your advantage. Because your banking is now entirely online and accessible via a mobile app, it makes sense to run everything else digitally. Otherwise, you run the risk of trying to manage small business tasks and taking up more time than necessary. What might take you a few hours can take business software a few minutes.
First, make sure you’re using invoicing software, so you can bill clients and get paid promptly. If you have employees and payroll, let a program like ADP handle that for you. Finally, consider using accounting software where you can log your expenses and incoming payments from clients. You can even link specific software to your banking account, so your banking activity will automatically transfer over.
2. Open a Business Checking Account
Speaking of banking accounts, many small business owners don’t see the wisdom in opening a separate business checking account. After all, if you’re a freelancer or sole proprietor with no employees, why would you need a separate account? For many reasons, of course, not the least is dealing with quarterly and annual taxes. It can get sticky trying to wade through your personal expenses and income to get to your business finances.
There are plenty of options online for free business checking accounts where you can arrange all of your business deposits and expenses. You can even pay yourself from your business account to your personal account and track how much money you make. For this purpose, you might want to check with your existing bank to see what kind of business checking account they can offer you. The easier you can make it for yourself, the better.
3. Keep a Business Credit Card
Many times, with a business checking account, you’ll be offered a business credit card. A business credit card can help you keep up with your expenses without waiting for incoming payments. If you typically use your personal credit card to take care of business purchases, you need a business credit card to separate those accounts. As a bonus, a business credit card will help you build credit for your business.
You’ll need business credit if you can foresee ever needing a larger business loan. Imagine you might need office space, equipment, or large staffing services. A business loan will help you with these expenses while you wait for income to start flowing. Whenever possible, it’s often best to have a business credit card with the same bank where you have your business checking account so you can link and track them better. You may also be able to collect points and earn rewards.
4. Manage Receipts
It might sound simple or obvious, but keep the receipt when you spend money for your business or accept payments. The IRS requires you to keep receipts for your expenses for three years. This means you should have a file somewhere with three years of business receipts. The reality is that many businesses don’t hold onto all their receipts for myriad reasons. They get lost or destroyed, they get mixed up with personal receipts, or maybe you never got one.
When you make it a point to manage your receipts, they’ll be there even if you never need them. In many cases, bank statements, canceled checks, and other forms of paperwork will suffice. But when you’re mindful of getting receipts, you’re also more likely to be mindful of where you’re spending money and how. As you shift to digital payments you can even keep a digital receipts file, you’ll feel more organized as a business owner overall.
5. Track and Categorize Expenses
As you’re receiving receipts for your expenses, make sure to track them! So many business owners wait until the last minute, sometimes at the end of the year, to track expenses. So you take a week or more of your life away from your business to fill out spreadsheets or review your QuickBooks Accounts. And if you paid by check, this means going through check images to remind yourself what the check was for.
Instead of that headache, which could include missing receipts and expenses, put a system into place to track and categorize all of your expenses. You could create a spreadsheet in Excel to keep it simple or sign up for an app online, which offers more insights. Then, make sure you categorize your expenses, so you know how to itemize them on your taxes. Categorizing your expenses can often make a big difference in how much you owe each year.
6. Make a Budget and Stick to It
One area where businesses large and small fail to track expenses is in the way of budgeting. You figure you’ll just keep working hard, paying bills, and attracting new clients, and in the end, the money will come in to pay for what goes out. Sadly, and for this reason, many business owners end up paying more than necessary for expenses and losing money. Then, when things are tight, you don’t know where to make essential cuts to keep your company going.
Making a budget each month and for the year will help you see where you could be saving money. It will also keep you on track to make greater profits by the end of the year. There are great online tools to help businesses budget, including QuickBooks, Freshbooks, and FreeAgent. Understanding your business budget will help you make projections for the future, learn how you could be making more money, and know where your focus should be.
7. Reconcile and Review Profits and Losses
All business owners should sit down with their bank statements at the beginning of each month to reconcile them. Bank reconciliation means you line up your check register with the credits and debits in your bank statement. This check register could be an old-school paper register or your online account. Again, many small business owners go months without reconciling, which allows things to pile up.
When you reconcile your bank statement each month, you can catch any fraud that may have occurred on your account. You are also better positioned to make a budget for the next month by looking at your profits and losses. Your accounting software will help you run a P&L after you reconcile. With that, you can tell how much your business is growing or whether you’re spending more than you’re making.
8. Set a Schedule to Stay Organized
Each of the seven tools and steps outlined here is useful for you to track your finances. But if you don’t have a plan in place to sit down and work with them, you may still find them building up. Then, you’re still sitting down for days or weeks at the end of the year, trying to get ready for tax season. And, you’re likely spending more than you need to and not making as much as you could for your business and, as a result, for yourself.
So, perhaps the most important way to track your finances is to set a schedule actually to sit down with them on a regular basis. Carve out time and put it on your calendar to spend an hour each week and a couple of hours each month going over your finances. And stick to it! You could review the previous week at your desk either Friday or Monday. Then, at the beginning of each month, between the 1st and the 5th, sit down to reconcile, pull your P&L report, and set a budget.
When you decide to organize your finances, track your expenses and income, and set budgets, the financial health of your business is more likely to thrive. You’ll also feel more free mentally to focus on your business and how to help it grow when you can see your numbers in black and white (hopefully not red). Also, if you can’t keep up with this bookkeeping process, you can always hire someone to do it for you. Just make sure it’s in your budget!
