Dire circumstances – like the economic challenges caused by the COVID-19 pandemic – call for reexamining business plans, including expenses. If ever there was a time for tightening the expense belt, this is it. But how do you know the number of belt notches you can cinch up before you cut off your business’ circulation and kill it?
A lot of the answers come from tracking the finances for your business during “normal” operations. You have been doing that, right? If not, during a pandemic is probably a bad time to learn that making informed financial decisions, including where to tighten the expense belt, only works when you track your business financial activity.
Tracking income and expenses may not sound important, but it is the most important financial management activity for your business. Why? Because financial tracking provides the historical record needed to see what income is really coming in and how much it really costs to produce that income and run the business.
Tracking your business financial activity involves three steps:
- Maintain a record of all financial activity.
The IRS does not specify a particular system or format for financial records. The only requirement is that financial records are accurate, complete, and provide enough detail to identify the business purpose of each item. Using QuickBooks or another accounting application is an option, but using a spreadsheet can work, too. Expenses should be tracked by category, such as rent, so you know where your funds are going.
- Organize financial activity using a logical filing system.
No matter what format you use to record your income and expenses, it’s important to keep support documents that capture the five information elements that are required by the IRS – when, what, who, how much, and why. In other words, capture the date, item description, payee/payer, dollar amount, and business purpose to substantiate the expense.
- Keep a running total of your financial activity.
Seeing the financial status of your business at a glance is immensely powerful. That power comes from complete and accurate tracking all financial activity and keeping running totals. QuickBooks or a bookkeeper can provide that information in the form of financial statements at any time. Spreadsheet users can achieve the same goal by keeping up-to-date totals for income and expenses.
Tightening the expense belt during tough times can help to keep your business afloat. Knowing where to tighten the expense belt, and how much, only works when you track your business financial activity. Without a clear view of income that is really coming in and how much it really costs to produce that income, you could cinch that expense belt too tight and cut off your business’ circulation.