Keen awareness of your finances is vital to any company, big or small – and as your business grows, effectively managing and tracking business expenses becomes increasingly essential for maintaining your company’s financial health.
Learn how to properly track business expenses with our expert strategies and tips below.
What are business expenses?
Business expenses are any costs incurred while you run your business. These include equipment, materials, transport costs, home office expenses, and more.
Business expenses are tax-deductible, given that they are considered valid by Inland Revenue and are correctly recorded with receipts or invoices.
If you are unsure of what are regarded as valid expenses, you can speak to an accountant for advice.
Why is tracking expenses important?
Each year, your business must pay taxes to the New Zealand government. Your tax payments will be based on the profits you earn in total, i.e. the cost of your business expenses subtracted from your revenue.
Since this taxable income depends on expense tracking, knowing your business expenses and keeping accurate records of them is vital to ensure you maximise tax deductions.
Tracking expenses is important for taxes and identifying spending trends. By keeping a detailed expense report, you can tell when and where your small business is spending the most, allowing you to optimise your funds for future profits.
How do you track expenses?
While there are many established ways to track business expenses, every business can adopt the following foundational steps.
Select the appropriate accounting system
There are two types of accounting methods that you can use to keep track of business expenses:
Cash accounting involves recording transactions only when cash changes hands. It provides a clear and immediate picture of how much money is available in the business account at any given time, making it particularly suitable for small businesses and startups with limited transactions.
It is also easier to maintain because it only requires tracking receivables or payables once they are fully settled.
Accrual accounting counts revenues and expenses as they are earned or incurred, regardless of when the cash transaction occurs. This method gives a more accurate picture of a company’s spending because it includes future commitments.
It is especially useful for larger businesses, helping to manage a financial budget more effectively by counting revenue and expenses in the period they occur.
Separate business and personal bank accounts
It is vital to separate personal expenses and business finances. Opening a dedicated business bank account ensures that personal and business transactions do not intertwine. This minimises the risk of missing business-related costs when tallying up expenses for your business deductions.
Ideally, you should have multiple business accounts. You’ll want a business checking account for regular transactions, a business savings account to earn interest on your profits, and a merchant services account to accept customer card transactions.
Categorise tax-deductible business expenses
To keep track of tax-deductible expenses, organise expenditures into categories such as rent, utilities, office supplies, travel costs, and equipment maintenance. This not only simplifies identifying spending patterns but also aids in preparing for tax time.
Maintain records
You must keep records of all of your business-related expenses, whether electronic or paper-based, for at least seven years. This will allow you to send your proof of expenses to Inland Revenue if they conduct a tax audit.
Keep your invoices, receipts, wage books, petty cash, bank transactions, vehicle logbooks, asset registers, and depreciation schedules. It’s also a good idea to keep track of business-related emails, especially if you claim flight expenses for meetings, as an example.
If your transactions are recorded as paper receipts or invoices, it’s a good idea to staple them to your monthly bank statement before storing them in a safe space. You can also scan receipts and invoices digitally to store with your other records—but remember to keep the physical copy as well.
Use accounting software
Tracking expenses manually may be viable if you are just starting as a small business, but as your company grows, it’s best to use accounting software to track your business expenses.
Using an automated, digital expense tracking system lets you easily record daily transactions and bank statements to ensure your financial records are correct when tax season comes. A clear overview of your business income and expense reports allows you to plan ahead so that you can maximise your profits.
Choose accounting software based on scalability, features, and compatibility with other systems you use. Most accounting software can directly receive data from financial institutions, streamlining the tracking of banking transactions.
Start tracking business expenses with help from BizEx software
Effectively managing your business expenses doesn’t need to be overwhelming. By setting up a robust system, categorising payments, and fostering a habit of regular record-keeping, you can optimise finances.
Start tracking expenses with BizEx to streamline your financial management processes. Let our POS and payroll software help you stay aware of your inventory and wage costs.
Contact us today to learn more about how we can help you maximise your business.