How to Manage Business Expenses Effectively
Managing a business can be difficult enough without also having to deal with all the costs associated with doing business. So to help you along on your business journey, here are three tips to help in managing business expenses effectively.
First and foremost when managing business expenses effectively, it is important to understand what’s coming in and what’s going out.
This is known as your Cash Flow. To do this, you need to consolidate all your accounts into one business account, and one business credit account. For small businesses, this works fantastically well and will help you on your startup journey.
When consolidating all of your accounts, make the ones you leave behind have a savings account that links to your checking in case of an overdraft. Have enough in your checking that lasts months worth of expenses and have enough in your savings to do the same. Sound practices that are in effect for managing your personal expenses also apply when managing your small business expenses.
As for credit, make sure you use only one credit card and only use it for your business. This same rule goes for all of your other accounts. Don’t ever mix your personal expenses with your business expenses. Don’t ever charge a personal meal or personal gas or some other personal purchase on a business card. Similarly, don’t ever have a business expense on your personal card. This is the case for two reasons:
When it comes time to pay taxes you can want to make sure that you write off all of your business expenses.
You can’t do that if you’ve mixed your personal and business expenses and accounts. It not exactly against the rules, but it can be extremely difficult, painful, and time-consuming.
You also don’t want to mix business and personal expense accounts because it breaks the corporate seal.
One of the amazing things about being an entrepreneur is that you can incorporate yourself and can separate your personal property and interests from your business property and interests. God forbid something ever happened to you personally, like a carpenter slips and falls on your driveway and you’ve broken the corporate seal. Your business could also be at stake in a personal lawsuit. If a court was able to show that you broke the corporate seal, your personal legal issues have now become your business legal issues.
The same applies in the opposite scenario. If you’ve broken the corporate seal and your business gets into legal or financial trouble, you could face personal legal issues.
So to avoid this issue altogether, have separate accounts for your business, separate accounts for your personal, and never mix the two. A fantastic trick when making sure you’re always able to make business purchases is to have duplicate cards. Have one credit card in your office in case you need to make online payments, and have a second card in your wallet for expenses while you’re on the go or traveling. This way you’re never far away from being able to expense as appropriate and you never have to worry about using the wrong card.
If your business needs a cash infusion, always have a way to deposit needed expenses into your business account.
Use one software for all of your invoicing and receipts. Doing this ensures that you have one place to reference when it comes time to understand profit and loss statements. It’s also a single source to reference and see how your expenses are broken up by month. You can then effectively plan for future months and cut costs. Most financial software systems these days have visual financial reports to showcase expenses by type. This is also a fantastic way to organize all of your receipts when it comes time to pay taxes.
The last and most valuable tip: Rotate your credit card numbers every six months.
These days, so many expenses are automatically withdrawn from our accounts and a lot of the things we buy as business owners are on a subscription basis. Rotating your credit card numbers every six months ensures that when these expenses hit, you have a buffer to then renegotiate the terms with the vendor.
For example, last year for about $500, I purchased some online marketing animation software. At the time it was fantastic, but this year, I don’t need it. Unfortunately, I was on a subscription and an additional $500 would’ve come out of my account automatically had I not rotated my credit card numbers. Because of this, the vendor got a notice, and I got an email saying that someone tried to put $500 on my business credit card. Now, I can go back to the vendor and say I don’t need your software this year but thank you.
Had I not rotated my credit card numbers I would be having a very different conversation with the vendor. I would have been asking them for a refund and hoping they give it to me. Believe it or not, this happens for five times a month. And usually before March each year, I save each of my companies about $4000 from software products that are no longer needed but would’ve been automatically withdrawn from my accounts.
So to recap the three tips on how to manage business expenses effectively: Always separate your business and personal accounts. Use one financial system for invoicing and receipts to better understand all of the money going in and all the money going out from one vantage point. Rotate your credit card numbers and account numbers every six months to avoid automatic payments to products you no longer need.
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