How to Track the Different Costs of Your Business

By September 25, 2019 Insights
How to track costs in your business

When it comes to succeeding in business, tracking the different costs of your business can make a huge difference. Awareness of your costs will not only make filing taxes easier but it could also help you claim expenses, resulting in a reduced tax bill and more money in your pocket! But what are the best ways to track the different costs and what are the expenses you should be tracking in the first place?

What does HMRC say about tracking expenses?

Before we get started on how to track the different costs, you should take a moment to understand what the rules are regarding your expenses. When you’re running a business or working as a sole trader, tracking your costs isn’t just a matter of personal preference. HMRC requires you to:

  • Keep a record of all allowable business expenses
  • Store all original documents, including receipts and invoices

And for how long you may ask? HMRC rules state that limited companies must hold on to records for six years, whilst the self-employed have it slightly easier with a five-year limit.

You also need to understand what an allowable expense is. Just like with how far back your record of expenses must go, allowable expenses depend slightly on whether you’re a sole trader or running a limited company. In general, as the name suggests, they refer to the different costs related to operating your business. This includes:

  • Any equipment purchases you need to make to conduct business, including things like stationery, clothing and materials you need to create goods
  • Travel costs you generate for business purposes, including car mileage
  • Service purchases related to your business, such as accounting or insurance costs

For a more detailed breakdown of allowable expenses, you can check out the government guide for self-employed and limited companies.

Start by categorising your costs

When it comes to tracking the different costs of your business, the first step is to begin by categorising your costs. This is something you can do as you’re researching the allowable expenses. Not all them will be relevant for your business so it’s important to start by creating detailed categories of the costs you’re actually generating.

For example, business mileage is a cost many sole traders can track and claim back. However, you might not ever drive for business and therefore, this isn’t something you need to worry about.

You could divide your costs in countless ways but here are some helpful categories to consider:

  • Advertising and marketing expenses
  • Rent, utilities and phone costs
  • Professional services, including accounting and insurance
  • Payroll and employee benefits
  • Meals and entertainment
  • Office expenses, including supplies
  • Travel expenses and business vehicles

A very basic tool for tracking the different costs of your business is to create a simple Excel-file with the relevant categories. Identify the different areas of spending, perhaps by looking through your bank statements, and write them down. You’ll have a detailed list of different spending categories and a way to track your spending.

Invest in accounting software

The good news is that you don’t have to manually enter and track your expenses forever. The above exercise is more about awareness. In the long term, you want to use technology and invest in accounting software. Good, cloud-based accounting software will:

  • Connect with your business bank account
  • Automatically import and categorise your transactions, including cost
  • Store your invoices for future reference
  • Allow you to upload photos of receipts to store them electronically

We have an informative post on what to focus on when choosing accounting software and it’s worth reading to make sure you find the right one for your business.

The great thing about accounting software is that it automates the tracking process, especially if you link it up with your bank account. You can immediately see your spending in different categories and then use that data for budgeting and filing your taxes.

The other major benefit is the ability to keep a record of the different costs. As mentioned above, HMRC requires you to keep hold of the original documents. However, this doesn’t necessarily mean to keep the paper versions, as they are pushing businesses to move towards digital record keeping. You can simply scan your documents and the software will categorise and mark them accordingly. With the right software, you’ll be able to create a digital storage of your receipts in case HMRC wants to have a look at it.

Use tracking apps and cloud storage to store your receipts

Whether you do opt to use accounting software or not, the crucial thing is to store your expenses. While accounting software can be the easiest option for this, there are other ways of storing and tracking the different costs securely. Several apps allow you to scan, analyse and back up your receipts and paper invoices. These include:

  • Google Drive
  • Dropbox
  • Receipt Bank
  • Snap

You’ll also find plenty of apps that make it easy to record business costs, such as mileage or travel. For example, Tripcatcher can help you record business mileage when you’re on the road.

Make tracking your costs a habit

Tracking your costs should become an activity you do regularly rather than at the end of the tax year. If you wait until the tax deadline to go over your bank statements and receipts, you’ll end up with a mess. Digital systems help with this, as they’ll automatically update and classify each cost category.

However, your costs might not always leave a digital trail. You could buy a cup of coffee for your client using cash and have only a receipt to mark the transaction. That’s why you want to get into the habit of tracking costs digitally as soon as possible. A document scanner on your smartphone can be useful, allowing you to scan those cash payment receipts on the go. But even a simple note outlining the spending on your phone or notebook can be helpful. Then at the end of each day, you can enter all the costs to your digital record.

Get help with your business expenses

If tracking the different costs of your business seems daunting or you need help with budgeting, talk to us at Devonshire Green. We can help your small business stay on top of relevant spending. Together, we can create a system for tracking expenses and ensuring you take advantage of relevant tax allowances. Contact us today for a chat about your needs!