If you are a small business owner or an active freelancer like myself, you need to be careful about the various types of expenses your business may incur every day. These expenses can spread your business thin and affect your operations.
One way to manage these expenses is by learning to categorize them and picking the right way to track them. Down below are some great tips you can try out with your business expenses:
Determine The Tax-Deductible Costs
Before you determine the best way to track your expenses, you need to identify the costs your business incurs each day or month. The first type of expenses you need to determine are your tax-deductible expenses or those considered as a tax write-off. These costs are deducted from your overall revenue and help you identify your taxable income. To determine these costs, you can consult with a tax professional or use tax software. Some examples of these tax-deductible expenses include direct labour, insurance payments, utilities, rent, and taxes.
Categorise These Expenses Based On Type
Now that you know these tax-deductible expenses, it is time to categorise them. Categorising your expenses not only helps you understand where your money is going but also makes it easier to track and manage your cash flow. Down below are the types of expenses you need to know as a small business and how you can categorise them:
Taxes
Taxes are a critical aspect of operating a business, encompassing various types that must be carefully managed. This includes state income tax, which is levied by individual states based on the income generated by your business. Local income taxes may also apply, depending on the municipality where your business is based. Sales tax is another significant consideration, as it requires companies to collect a percentage of sales from customers and remit it to the state. Additionally, excise taxes may apply to specific goods or services, such as fuel or alcohol, and personal property tax, which is levied on tangible assets like machinery or equipment owned by the business.
Rent and Utilities
Maintaining a physical presence is essential for many businesses, which makes managing rent and utility expenses crucial. Rent typically includes the costs associated with leasing office space, retail locations, or warehouses. Utilities cover essential services required for daily operations, such as telephone bills, internet connection, electricity, heating, and water. Small businesses operating from home can prorate home office expenses to reflect the portion of your residence used exclusively for business, allowing you to include setup costs like a dedicated workspace, equipment, and related utilities in your financial planning.
Insurance
Protecting your business against unforeseen events is vital, so insurance should be considered a key category in your budget. Commercial property insurance protects your physical assets from risks like fire, theft, or natural disasters. Professional liability insurance protects against claims of negligence or malpractice arising from your professional services. Other policies, such as product liability insurance for goods sold or workers’ compensation for employee-related injuries, should be considered to ensure comprehensive coverage.
Vehicle Expenses
If your business relies on vehicles for transportation, delivery, or service, accounting for all associated costs is critical for accurate financial reporting. This includes vehicle purchase or lease payments, regular maintenance and repairs, insurance costs specific to the cars, and all operational expenses. Gasoline costs, toll fees incurred while travelling, parking fees at various locations, and even depreciation of the vehicles should be calculated to give a complete picture of transportation expenses.
Compensation
Compensation encompasses the wages and salaries paid to employees or contractors who provide labour for your business. This includes not only hourly wages or salaried payments but also bonuses, overtime pay, and any additional compensation for contracted services. It is essential to track these costs accurately, as they represent a significant portion of your business expenses, impacting your overall profitability. Proper compensation classification can also help ensure compliance with labour laws and tax regulations.
Have A Separate Bank Account For Expenses
Suppose you are having trouble tracking your expenses. In that case, it is best to use a separate account only for these expenses. For example, you can have a bank account that will pay for all your utilities, like electricity bills and phone bills. Make sure to watch over the balance for this account so it won’t get deactivated after you pay off your expenses using this account.
Use Free Financial Trackers
Don’t hesitate to use free online tracking apps or available software. These tools are essential for practical computation and can streamline the creation of invoices or reports for your records—strong options include Mint, QuickBooks, and Expensify.
Monitoring your small business expenses is crucial—especially when tax season rolls around and maintaining your business’s financial health is at stake. If hiring an accountant isn’t feasible or you lack the time for manual transaction recording, implementing the above solutions will simplify your financial management. You can efficiently track your finances with a few strategic adjustments to your setup.
Need to learn how to brow your business as a freelancer? Check out my journey and how I manage to sustain freelancing for 10 years.
