Managing expenses efficiently is key to maximising the business growth of a startup. It also helps in keeping cash flow in check. According to recent statistics, 82 percent of businesses close their doors because of inadequate cash management.
You can do it yourself or hire an accountant, but managing finances is a business requirement. From travel expenses to the cost incurred for trainings and seminars, tracking your startup expenses is essential for various reasons, including:
- Tax purposes
- To identify areas where you can save money
- To make operational adjustments based on the economic or market changes
Besides, it helps preventing potential financial problems in the long run. As you track your income and expenses on a regular basis, you will know where your money goes. This will further help you prepare a realistic budget for your startup and you will be in control of your finances.
The first step is to create an expense tracking worksheet and label it with the income and expense category and update in on a regular basis. Here are a few ways to track your business income and expenses to better manage your budget.
1. Envelope Method
Startups often use cash to make payments. If your company works on cash only basis to make payments this method will help you track your money better. Collect some envelopes and label each of them with proper spending category, ranging from loan repayment and transportation to rent, repair and electricity or other utility bills. Also, mention the amount on the envelopes and update your expense tracking worksheet accordingly.
When income is received, put the cash equivalent to the amount mentioned inside each envelope. If possible, keep aside the amount of money you will need for each category for the next three months. But make sure your expense should not exceed you total income.
The envelope system is a convenient way of handling money. But there are a few things you need to keep in mind. For example, you must note the amount and date on each envelope as well as keep the receipt for each category in the envelope. Also, keep your envelopes in a safe place and never shift money kept in one envelope to another. If you have any unused cash at the end of the fund, put it aside as savings or emergency fund.
One major drawback of using this system is that it is not very safe to keep cash around your office. Besides, you are more likely to be tempted to spend it as it is so accessible. But when combined with other expense tracking systems, envelope method offers both convenience and safety.
2. Receipt Method
Saving receipts, including all cash register receipts, sales slips and other receipts is a great way to track expenses. Keep all your receipts in one location for easy accessibility. Make sure you have receipts for every penny you spend, no matter how small the amount is. For recording cash purchases (especially for items you do not receive a purchase receipt) write it down on a small notepad along with the date.
Another option is to make paper receipt and label them by expense category such as rent, repair and transportation etc. Sort them according to their category and keep in an envelope, box or other container. You must update all amount spent on your expense worksheet on a weekly/monthly basis. Empty the envelope/container once you have updated the amount on your worksheet. However, do save those slips and receipts for future tax purposes and/or warranties.
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This method is easy to follow if you are organized. Besides, your employees (especially those making purchases on behalf of your company) should cooperate and take responsibility to help you organize receipts according to their category.
The goal is to ensure that there are no gaps in your record of expenditures as such practices also help in organizing tax-deductible items and simplifies the entire tracking process.
3. Checkbook Method
Many small business owners prefer writing checks to pay their bills. The check register method is a great option for them as the check they sign automatically becomes a receipt of their transaction. But it is imperative to record all your transactions in your checkbook register including information like the amount spent, name of the company or person to whom the check was written, and the item/service purchased. You can also get duplicate checks in order to keep record of them, but you have to pay a little more for that.
Usually, it is best that the checkbook method be combined with cash funding/envelope method as writing a check for small items is not recommended. Having some cash fund will help you cover smaller expenses; however, make sure you maintain the expense worksheet accordingly and plan this in your budget. You can write a check to withdraw the cash required to meet smaller expenses and allocate the amount using envelope method.
Always check ledger with the bank statement as your monthly bank statement arrives. Keep a record of the total expense and income in a journal to get a clear understanding of your financial status. Also, keep copies of your bank statement and checks for future tax and loan purposes.
The advantages of using checkbook method are numerous, including:
- It is a logical way to track your startup’s income and expenses
- Checks are proof of payment and can be used as receipts for tax purposes
- For regular bills you can preauthorize payments
- If you have larger minimum balances, you can opt for checking accounts that pay interest.
However, there are certain drawbacks as well. For example, you need to pay a per-check charge or service charge in case your balance is below the required minimum. To prevent bounced checks make sure you update your bank account regularly. Additionally, you can get overdraft protection to avoid this issue.
4. Account Book Method
Some money managers prefer keeping a daily record of their income and expenditures. If this sounds convenient to you, there are several commercially available account books or accounting software that can help you keep records accurately. Alternatively, you can use spreadsheet to track your expenses and income. However, this manual process requires some accounting knowledge and experience.
The online accounting software, on the other hand, allows quick financial updates and also helps you figure itemized tax deductions. Some of them also help you create, send and track invoices, making billing a painless experience. They also update the worksheet automatically once you receive a payment and calculate taxes for you.
To track your expenses, simply add the expenditures on a summary sheet on a weekly/monthly basis and you can see where your money is going.
Conclusion: Selecting a Tracking Method
There are various ways to track your expenses. While some are very simple and quick, others are detailed and time-consuming. But it is very important to streamline this process. You need a simple and inexpensive way to track your company expenses. Online options are your best bet here. There are several expense, invoicing and time tracking tools available online to help you streamline your accounting and billing process. Some of them are fairly inexpensive and easy to use.
No matter which expense tracking method or tool you use, it is important to update your worksheet on a regular basis. It is indeed a time consuming affair, but the rewards make it worth the pain. Having a clear idea about your current financial status will help you to make better business decisions and eliminate unnecessary expenditures.