Expense management can be challenging for small business owners with a full slate of other responsibilities, but you can’t let it fall by the wayside. Thankfully, there are simple things you can do to spend more intentionally and prepare your business for scaling.
What you need to know
- Business expenses are tax-deductible costs including payroll, rent,
equipment, marketing, and other expenses that are necessary for you to
run your business. - To save time, reduce spending and errors, and ensure tax compliance, open a business checking account, use automated accounting software, and hire an accountant or bookkeeper.
- Other employee tools to help you save time on expenses include issuing additional debit or credit cards to your team and collaborating on a business expense policy.
What counts as a business expense?
A business expense is any normal expense that’s necessary for running your business, while a personal expense is any expense that’s not necessary for running your business. The distinction matters because business expenses are tax deductible and therefore can be used to reduce the cost of running your business when filed properly.
For a payment to be a business expense, it has to be a usual, necessary expense for operating your type of business, such as (but not limited to):
- Payroll and benefits
- Rents, mortgages, and utilities
- Equipment purchases and leases
- Manufacturing materials
- Inventory and storage
- Advertising and marketing
- Office supplies
- Travel and commuting
Business owners sometimes struggle with differentiating personal expenses from business expenses if they’re using personal loans to fund their startup phase or reimbursing employees who pay for business expenses with personal cards. You can eliminate these issues by using and issuing business credit and debit cards.
Common ways you could be losing time on expense management
Poor management of your business expenses, especially when using manual systems, costs your company both money and time. Here are some potential problems you could face if you don’t use automated software:
- Overspending: Buying materials without an expense strategy can cause you to spend more, leading to an inflated budget compared to a planned budget.
- Poor scaling: Effective scaling can only happen if you partially or wholly automate your expense management, otherwise tracking expenses will become increasingly cumbersome.
- Delayed insights/results: Manually gathering and analyzing your expenses takes much longer than doing it with an automated program. With software, you can get faster access to important financial information.
- Frustrating systems: The delays of manual expense management will mean your employees will be subject to more human error and inefficiencies, such as receiving reimbursements later. This increases frustration and potentially turnover.
- Poor workflows and integration: Manually managing your expenses (or not managing them) disrupts other workflows and prevents you from fully integrating your bookkeeping and accounting systems. This affects growth and your ability to scale.
- Tax noncompliance: Mismanaging your expenses could get you in trouble with the IRS, leading to penalties. It could also cost your company money if you don’t receive all your eligible deductions.
Expense management best practices
It’s critical for you to implement the following three practices into your company. Your employees, partners, shareholders, and customers will all benefit from it.
1. Open designated business accounts and cards
It’s critical that you separate personal and business expenses. The best way to do that is to open a designated business checking account and apply for a business credit card. For business expenses, only use your business accounts.
2. Use automated accounting software
Invest in a good automated accounting system. Look for one that has a user-friendly interface, bill scanning, and integration with your bank. You can use this system to categorize your expenses, track spending, and run financial reports.
3. Hire an accountant or bookkeeper
If you’re not a professional accountant or bookkeeper yourself, hire an accountant to help handle your finances. Delegating those responsibilities allows you to focus on what you do best—running your business.
More ways to save time on expense management
Once you have a business bank account and credit card, automated accounting software, and an accountant or bookkeeper under contract, you can move on to the following steps:
4. Sync your accounting software to your checking account
Syncing your accounting software to your bank account gives you real-time insights into your income and expenses. Most accounting softwares also provide reports, such as for expenses or profits and losses. Those can improve your planning for future budgets.
5. Implement a business expense policy
A business expense policy establishes consistency, keeps your company and employees in compliance with spending rules and regulations, and helps you control expenses. It also eliminates any uncertainty over what’s allowed or not allowed by employees or management.
6. Categorize expenses
Use the expense categories in your accounting software to set up expense categories for itemizing budgets. Match your categories with IRS Schedule C to simplify tax preparation.
7. Issue additional cards to employees
Expense reimbursement can be a time-consuming and costly process. Issuing debit cards to your employees can eliminate that need and simplify expense tracking. You’ll want to create a clearly defined expense policy and criteria for choosing which employees get issued a card.
8. Train your staff when implementing new processes
Comprehensive training on new processes will increase efficiency, reduce errors, and minimize employee frustration.
9. Revisit your expense management processes regularly
Review your expense management policies frequently to ensure they’re still working. This can help you adapt to changing business or market conditions, like rising prices or limited supply or demand. Stay on top of this so you’re never caught by surprise.
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