Why Tracking Your Expenses is Smart and How to Start Today
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Unless you’re willing to take on some extremely high monetary risk, the old adage is almost always true: you have to spend money to make money. No matter what your business involves, there will be some costs associated with it. There’s a reason why the retail industry as a whole spent well over 8 trillion dollars on operational expenses in 2009, according to the U.S. Census Bureau.
If you’re a startup, it’s even worse – you need to be sure that you have plenty of extra money around in order to anticipate any unexpected costs. Add to this the fact that fiscal irresponsibility and lack of financial planning are two of the biggest factors in business failure. Being lackadaisical about monitoring your cash flow can quite literally cost you your business, and spending money on things you didn’t need, or failing to shop around, will sting in retrospect. So, it should be very clear that you need to track every cent that is received and spent by your business. For entrepreneurs, especially online entrepreneurs, you may need to do this tracking yourself.
Organizing Your Expenses
The first step involved in smart money tracking is categorizing your business expenses. Creating a balance sheet is perhaps the most comprehensive way to examine what you’re spending money on.
A balance sheet contains both assets and liabilities. In very simple terms, assets represent the money that you have, while liabilities represent where you’re money is going. There are two types of liabilities: current and non-current. Current liabilities include:
Accounts Payable – These expenses represent money owed to trade suppliers that have provided goods as inventory or other services essential to running your business.
Accrued Expenses – These costs involve money that is owed but not billed, such as payroll taxes and wages.
Notes Payable – These involve obligations such as promissory notes that mature within one year.
Current Portion of Long-Term Debt – This figure represents the amount of long-term debt that must be paid within the next year. An example of this would be a large loan that was used to purchase a business space.
Non-current liabilities include:
Notes Payable to Officers, Shareholder or Owners – This is exactly what it sounds like. If you’re a small, startup Internet business, you might not have to worry about these costs for a while.
Non-current Portion of Long Term Debt – This involves term loan expenses that are due after one year.
Contingent Liabilities – This category accounts for things that may become liabilities, such as lawsuits.
These categories are standard for any business. In simpler terms, a balance sheet forces you to think about common expense categories such as:
- Employees (wages, benefits)
- Office supplies
- Licenses and permits
- Leasing equipment
Costs associated more specifically with Internet businesses include:
- Domain name
- Internet service
Tools For Tracking
It’s simple to create a balance sheet using a spreadsheet editor such as Microsoft Excel or a free alternative such as Google Docs spreadsheet (the latter allows you to easily share the document with co-workers). Microsoft also offers a free balance sheet template for Excel users. Several other programs exist for managing business expenses, including:
- Sage Peachtree
These products vary in cost and features. For example, Outright is free, while Quicken starts at around $20. Some of these programs also allow you to focus on your personal expenses. Also, it’s important to have a filing cabinet that has folders for each of your categories. Keeping receipts, bills, check stubs, invoices and other paper documents in order is essential for staying organized. If you receive many of these notifications through email, consider using an email client such as Thunderbird to easily create folders and manage these types files.
There are some specific practices that should be considered in order to most effectively track your expenses. They include:
Personal vs. Business – Always pay for business expenses from a dedicated account. Not only is it ethically justifiable, but it makes tracking much easier. Keep all business files apart from personal files, and get a dedicated business credit or debit card.
Adapt – The whole purpose of tracking your expenses is to avoid spending money needlessly. If there’s anything in your files that you could be paying less for, always investigate your options. For example, it’s imperative for an online business to compare Internet providers instead of paying an unnecessarily high rate.
Do the Work Immediately – Effective tracking involves processing invoices and purchases right away. Getting behind can lead to lost files and inaccurate expense reports.
Hire Out – If your business gets big enough, it’s very wise to hire a CFO or pay for an accounting consultant’s help. It’s better to spend the money getting it done right rather than doing a rushed, incomplete job yourself.
Don’t Forget About Deductions – As you track your expenses, it’s beneficial to make note of the things that you can deduct from your taxes. Check out the IRS page on deducting business expenses to learn more.
About the Author: Mitch O’Conner is an online marketer and writer. When he’s not busy testing sites, generating traffic or writing content, he enjoys spending time with his wife and kids, watching TV, playing games or going camping.
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