Must Start Tracking Your Business Transactions
Nobody likes tracking their business transactions. Money comes and goes from your business daily, and it’s mind-numbingly boring when you keep track of every purchase or sale.
Many small business owners avoid doing this for that specific reason, often falling into the habit of tracking the “big” transactions and avoiding all else.
Or, sometimes, you don’t track things at the time and then try to find the transactions later. This is not a smart way to run your business as keeping a log of your transactions as and when they happen is essential for multiple reasons.
Below, we’ve listed some of the main reasons you need to keep track of things. Moving through the list, you’ll see why this is so essential. Discover the benefits of doing it and the consequences of neglecting this task!
Ensure You’re Paying The Right Amount Of Tax
First of all, tracking your business transactions helps you pay the right amount of tax. Neglecting to do so will lead to one of these problems (both of which are pretty terrible):
- Paying too much tax and wasting valuable money;
- Not paying enough tax and getting hit with financial penalties;
Transaction logging is critical as your taxable income depends on how much profit you make. As such, you need to know how much money you’ve earned as well as what you’ve spent during the tax year.
Having all the data with you will easily let you see your total profit and taxable income, so you’re paying exactly what you need to pay.
Helps You Spot Tax Deductions
Staying on the tax topic and tracking transactions will help you spot valuable tax deductions. Every business can make a list of itemized deductions that are removed from their taxable income.
It’s worth trying to learn how itemized deductions work to get the most out of this, but there’s a quick rundown of what it means.
Certain things you spend money on can be classified as “deductions” because you need to spend the money to benefit your business.
As a result, the cost of these things will be deducted from your profits. Let’s say you spend $1000 on marketing, this can be removed from your overall profit when making a tax calculation.
Consequently, you can lower your taxable income and pay even less tax. It’s perfectly legal, though it helps to work with tax experts so you know what can and can’t be deducted.
If you’re found to be deducting ineligible items, you might get some financial penalties. It’s way easier to spot legit deductions when you have a log of all transactions, as you can pinpoint the items and quickly see how much money gets deducted.
Find Your Cash Flow
There’s so much to learn about the financial side of a business. It extends way beyond the simple concept of making money as fast as you can. A lot of new business owners forget about something important when managing their finances: cash flow.
What is cash flow? It’s the flow of cash through your business – in other words, the money coming in compared to the money coming out. You’ll measure your cash flow over multiple periods: a month, a quarter, and a year. Monthly cash flow reports are critical for understanding the current financial health of your business.
For example, a company can be on course to make a profit, but it may have a negative cash flow. This means there’s more money leaving your business than there is coming in.
Eventually, you might even move things out and into a positive cash flow. The problem is that a negative cash flow affects many sides of your business.
If there’s not enough money coming in one month, then how will you pay your bills and employees? Cash flow management forces you to look at your finances and ensure there’s always cash to cover your main expenses. That’s where the significance of tracking your transactions comes in.
It lets you see your cash flow by calculating ingoings versus outgoings. From here, you may identify ways to improve your cash flow and secure more working capital for your business.
Spot Fraudulent Practices
It’s easy to think that a small business will be free from fraudulent practices. When you hear of fraud in the news, it usually comes from huge companies with thousands of employees. It’s a lot harder to keep track of all the goings on when you run a massive enterprise like this!
Nevertheless, small companies can be the victims of internal fraud just as frequently. Having fewer employees means they’re more likely to take advantage of you as they think you won’t notice. It can be small things – like pocketing petty cash – or much bigger things, like embezzling business funds.
The type of fraud doesn’t strictly matter; what matters is that you stop it from happening. Keeping track of every transaction is the safest way of doing this. You’ll see every transaction that’s made to or from your business account, so it’s easier to spot fraudulent patterns.
Especially when the finances don’t add up, and it looks like you’re missing money somewhere. Consulting the transactions will help you discover the lost funds.
Get Better Control Over Your Budget
Lastly, logging your business transactions gives you more control over your budget. This links to your cash flow as it helps you see where your money is disappearing.
You’ll quickly notice areas where your business can stop spending money, freeing up more space in your budget and improving the cash flow.
Don’t fall into the trap of letting your transactions run free. You need to know where your money’s going and how you’re generating funds as well.
There are loads of different accounting software programs that link to your business accounts and automatically track all of your transactions. In other words, there’s no excuse to neglect it anymore! Start tracking everything, and you’ll see all the benefits above.
