Does your process of managing your business expenses equate to keeping your business receipts in a messy drawer or shoebox?
For small business owners, recording and tracking your expenses efficiently may seem a low priority. But an automated approach can save you lots of time and money in the long run, avoid costly errors and give you powerful insights into your company’s performance.
This is especially the case now that cloud-based accounting software, in combination with receipt-snapping apps, have transformed the record-keeping environment for firms of all sizes.
Why you need to keep records of business expenses
Keeping organised records of your expenses is essential to help you comply with tax and regulatory requirements, avoid overpaying tax, boost efficiency and grow your firm.
HMRC allows you to offset some of your expenses to help reduce your tax bill. For example, if your turnover is £80,000, and you claim £20,000 in allowable expenses, you only pay tax on the remaining £60,000 – a substantial saving.
Keeping accurate records of your costs is therefore essential to avoiding overpaying tax. It also makes sure you don’t underpay tax or fail to produce records when requested, both of which risk HMRC penalties, which can run into tens of thousands of pounds.
If you have a limited company, you’ll also need your cost figures for your annual corporate reports, which again carry penalties for non-filing.
But good record keeping is not just about ticking tax and legal boxes.
Keeping up-to-date and accurate records means you get a clear handle on the financial position of your business at any time, enabling you to make better management decisions.
For example, this enables you to plan for future tax liabilities, control costs in areas where you might be over budget, and reinvest any surplus for expansion.
It’s also essential to have clear, up-to-date records if you need credit or investment because you must show them to potential banks or other lenders. The same applies if you want to be acquired by another business.
Business expenses that you must keep
To be able to file your annual accounts and company tax return, you must keep records of all money your company has spent, for example in receipts, cash books and in accounting software.
HMRC can penalise you £3,000 or you could be disqualified as a company director if you don’t keep these records.
Your expense records must include those for all goods bought and who you bought them from, unless you run a retail business.
You must also retain any other relevant documents, for example bank statements and correspondence.
How long to keep business expense records
HMRC may look at your expense records to check you are paying the right tax.
The time you need to keep them for depends on whether you are a limited company or self-employed.
If you are unincorporated or a sole trader, you need to keep records for five years after 31 January of the relevant tax year.
Limited companies must keep records for six years from the end of the relevant financial year. Or you may have to keep them longer if:
- They include a transaction that covers multiple accounting periods
- You’ve bought something you expect to last more than six years, such as equipment or machinery
- You sent your company tax return late
- HMRC has started a compliance check into your company tax return.
If you don’t keep your records for the right period, HMRC can levy penalties ranging from £250 for a company in its first year to £3,000 if you deliberately destroy records.
Why spreadsheets and shoeboxes aren’t efficient
There are no rules about how to keep expenses records. You can keep them on paper, in a spreadsheet or in your accounting software.
But HMRC can penalise you if your records are not readable, accurate and complete, which is one reason why accounting software is the best option. Developments in accounting systems have made it easier and cheaper to store, organise and share your records clearly and accurately.
By integrating with receipt snapping apps, software can also help you record expenses on the go, anywhere.
The software packages can then store a digital copy of a receipt with the accounting transaction, making sure your records have the appropriate supporting information all in one place – not buried at the bottom of a shoebox.
Another feature of modern software is bank feeds, which automatically download income and expense transactions from your bank statement into your system.
Once connected, these enable the software to produce a cash book that stays up to date automatically and which you can populate with pre-set rules – for example, to recognise, tag and categorise certain suppliers.
Accounting software is also becoming smarter in many other ways, with functions such as workflow, automation tools and links to HMRC – all of which make record keeping faster and more efficient.
Alongside other innovations, such automation can save up to 80% of record-keeping time for you and your staff.
This helps you complete your books faster compared to using spreadsheets and shoeboxes, giving you more time to focus on revenue generating activities.
Automation also makes it easy to compare cost records with previous years, to help track and visualise the progress of your profit figures.
Plus it reduces errors, ensuring that you have accurate and up-to-date information to help steer your business.
How software can reduce the pain of managing business expenses
Keeping records of expenses regularly updated in your accounting software can ease the pain of end-of-year bookkeeping significantly.
Submitting tax documents involves finding and entering many items of information. If that information is disorganised, and in multiple places, this becomes an awkward and frustrating task.
You may well postpone it until the last minute, adding to your stress levels come tax return season.
Rather than spending time looking for, sorting and filing receipts and cost data, imagine spending that on more productive tasks.
Paper records first have to be made by chopping down and mashing up trees, which is not great for the environment.
They get lost or misfiled; coffee spills on to them; or they get crumpled, torn or faded. You scribble notes on them or accidentally throw them away.
Even if you have an organised filing system, it can still be much harder to locate records compared to a digital, cloud-based storage system, which will always enable you to find items in seconds, from any device or location.
Accounting software does away with all these problems and declutters your workspace of all that paper.
Using software with bank feeds also means you don’t need to wait for a bank statement to get a clear picture of your finances – you can stay on top of your expenditure as it happens.
With the right software, those transactions can also be reconciled with your business accounts automatically, so your books always add up.
Conclusion on managing business expenses
Embracing automatic record keeping removes the burden of bookkeeping with a stroke. With finely tuned processes and technology, you can make sure you pay the right tax, then finish accounting tasks quickly, and move on to more value-adding activities.
Receipt-processing apps also enable you to capture expenses information with an upload, snap, scan or email, in real time, from anywhere.
Plugging this data straight into a cloud accounting system is powerful, in terms of efficiency and the way it can give you real-time insight into your business.
Such a smart approach means you can track performance easily, manage your spending more proactively, and make better, faster decisions about borrowing or investment.
This sets you up for faster growth and finally allows you to chuck that messy receipts shoebox into the recycling bin.
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