Tracking Expenses The Old Fashioned Way

teThe best hint anyone ever gave me for keeping track of my business expenses was decidedly low-tech. A writing buddy, complaining about how disorganized she was with her records, mentioned that she just threw all of her receipts into a cardboard accordion file and then took the mess to her accountant in January. The proverbial light bulb went on over my head: “Aha! An accordion file! Why didn’t I think of that?”

Until that point, I had fancied myself on the cutting edge of expense record-keeping: I had designed a spreadsheet that kept a running tally of business expenses, and I always knew at a keystroke how much I was spending on subscriptions and fax paper or what my total deductible business expenses were on a year-to-date basis. But my receipts and cancelled checks were just piled in a shoe box. If I ever got audited, it would probably take me days to sort through all the paper. And I’m sure that I was losing deductible expenses because I was losing receipts.

Although my friend doesn’t know it, her system can work, and it provides the bare minimum for anyone out there who hates tracking expenses but doesn’t like being disorganized. But first, here are the three main reasons for logging your expenses.

WHY KEEP EXPENSE RECORDS?

For most of us, taxes are the main reason we track expenses. Every dollar that you spend on deductible business-related activities can save you 50 cents or more in federal, state, local, and self-employment taxes–so it’s crucial that you document those expenses exactly.

But there are two more important reasons to keep these records. One, in many cases, you can pass on these costs to clients (and even mark them up) if you have adequate documentation. And two, you need to keep solid expense records to run your business better. Expense records provide valuable data that you can use to improve job estimate, make purchasing decisions, and estimate your year-to-date tax situation.

Unfortunately, it seems there isn’t one perfect system that will allow you to track both pass-through expenses for your clients and tax expenses for yourself. Most independent businesspeople who create a lot of both kinds of expenses keep pass-through expenses together with their invoicing systems and use a separate money-management program to track expenses for tax filing and business-management purposes.

CONTROL YOUR PILES OF PAPERS

To start, though, here’s a paper-tracking system that can easily stand alone or lay the basis for a moe sophisticated system: Designate a box or folder FINANCES TO BE FILED. (I use a green–for money–folder, which I keep in a plastic sleeve that hangs on the wall.) Make this container your sole receptacle for receipts, cancelled checks, and notes to yourself about expenses whenever they come in.

When it comes time to record your expenses in your (paper or computer) ledger, work from the box. As you record the receipts, put a control number on each receipt that corresponds to a number in the ledger program you are using. For example, if you have a receipt for photocopying costs, and you enter that expense on line 18 of your ledger, write “18” on your receipt. If your program gives you transaction numbers instead of line numbers, use that number. Or assign your own number to each entry.

The cardboard accordion file is the ideal place to store receipts once they’ve been recorded. Label each section of the file with a category that corresponds to a deductible expense. For example, have a category for supplies and another category for freight. These are separate categories on the Schedule C income tax form that all sole proprietors must file. As you record the receipts, put them in the appropriate section of your folder.

SOFTWARE TO TRACK EXPENSES

Here are the three categories of software solutions for tracking business expenses.

Money-managers. For a small business, many of the personal financial managers such as Quicken, Managing Your Money, MacMoney, and MoneyCounts work quite well for recording expenses. These programs are all based on principles of double-entry accounting–although they hide it from you for simplicity’s sake–and they let you set up your own categories for income and expenses.

Set up expense categories that mirror the categories on the tax forms, such as the Schedule C. At the end of the year, you can just call up a report for each category, or–if you select compatible programs–export your business-expense data directly into your tax-preparation program.

Money-management software also allows you to record your income. For example, Managing Your Money will do a quick year-to-date tax calculation to make sure you are paying the right amount of estimated taxes.

Spreadsheets. If you are comfortable with basic spreadsheet software, you may want to set up your own ledger for tracking business expenses. That’s what I did, using the spreadsheet module in Microsoft Works. My worksheet looks like a ledger; it has a separate, automatic-totaling column for each expense category on Schedule C. There are columns along the left of the spreadsheet for the date, receipt number, amount, and expense category. If I want to see all of my expenses for a particular category together, I simply sort the entries by category. I number my receipts with the line item of the expense as I’m entering it. Since I use my spreadsheet to record my income as well, I always know roughly what my taxable income for the year looks like.

Time and expense trackers. People who bill their clients for many of their expenses need a different kind of record-keeping system, and the one that I hear the most about is Timeslips III for MS-DOS and the Mac.

Timeslips is a big program that enables you to track and invoice jobs done for hourly rates. It also lets you bill clients for expenses associated with different jobs. Once you set up your own categories of pass-through expenses (such as printing, travel, and the like), you enter expenses with a few keystrokes. The program will mark up the pass-throughs according to your instructions, add sales taxes where appropriate, and invoice the client by job title.

Scott Anderson, of Bellingham, Washington, runs his writing business with Timeslips and MoneyCounts. He keeps his cash-flow expenses on MoneyCounts for year-end tax accounting. But for expense pass-throughs he uses Timeslips.

Anderson thinks Timeslips helps with job estimating. “With the time- and expense-tracking features, I can easily track all the cost associated with preparing a newsletter for a client. Once I have done two or three newsletters of the same nature, I can give new clients a reasonable estimate of the total cost of their projects,” he said.

MAKE IT EASIER

Sometimes tracking your expenses can feel like as much work as your main job. But without a viable system for seeing what you’ve spent, your main job can go down the tubes. So use the ideas outlined here to set up some method to track expenses–whatever works for you is as good as money in the bank.

 

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