Why and How to Categorize Receipts for Small Businesses

One common mistake entrepreneurs make when starting a small business is not categorizing receipts or tracking expenses. While you, as a small business owner, can still run your business without this critical process. 

But you will soon realize that the leaks and losses you might incur far exceed the effort required to optimize your financial management. 

While manually managing all these receipts and expenses is tedious, an automated platform such as doola Bookkeeping can immensely support your efforts. We at doola take meticulous care of your financial health.

In the business world, categorizing and cataloging business receipts helps you immensely during the tax season and enables you to track and analyze expenses. 

In this article, we will explain why you need to track and analyze your expenditures and income and discuss how tracking your expenses and income can reduce your tax obligations through deductions and offsets. 

Business Receipt Organizing Strategies

Organizing business receipts, expenses, and income is essential when you 

want your business to be as efficient as possible. You can only remain steadily profitable if you know your primary expenditures and how to optimize them. 

Here are practical strategies and tips for better managing your business’s financial health. 

Pre-Plan and Start Early

Create an organized system to categorize your business expenses while labeling receipts under individual heads. Managing both physical and digital receipts is extremely important here. Storing physical receipts organized and managed will save you time during the tax season and will save you tax along the way. 

Scanning the physical copies and keeping a digital record prevents data loss and enables deep analysis of expenses and income in one place. It is essential to keep these records accessible and well-categorized to ensure easy retrieval when required.

Save all receipts

As mentioned earlier, make sure you retain and store all the receipts regardless of their size. This will help you claim deductions on your tax liability. For example, there are numerous deductions in home-based businesses. 

Business expenses such as utilities, office supplies, and mortgage interest are eligible for write-offs. This is why it is essential to store receipts that can be accessed while filling out tax forms. 

Organize in chronological order

Keeping all your receipts in chronological order will help you pinpoint a specific receipt and save you immense time and effort in case of an audit. 

The best practice for physical receipts is to keep the latest receipt at the front and so on. 

You can then use labels or post-it notes to mark months or receipts of interest. Similarly, for digital receipts, you can create folders with specific months and categorize them in this way. 

Categorizing Spending Heads

Simply put, spending heads are various collections of expenditures that belong to a common category, such as travel, food, advertising, etc.

Here is a brief list of major categories that can be found in many small businesses. 

Advertising and Promotion 

This will include all expenditures on business cards, brand events, posters, website design, etc.

Travel 

You can claim deductions on several expenditures during a business trip. Travel expenses include airfare, transport, tools, lodging, meals, etc. 

Utilities

This will include the cost of utilities such as electricity, water, maintenance, etc.

Communications 

Under this head, you can include things like internet access fees, cell phone expenses.

Supplies

This head will include the expenses incurred for producing your product or delivering your service. These expenses include office materials, cleaning materials, coffee, and IT hardware and software.

Benefits of Maintaining and Managing Receipts

Paying attention to what you spend goes way beyond calculating tax deductions and gives you holistic visibility of your spending.

Let’s see how managing your finances will help you. 

Improved cash flow management

By categorizing and accurately labeling transactions, you can track incoming and outgoing funds accurately, giving you a clear picture of your business’s financial health.

This will also assist you in detecting cash flow issues and leaks. By managing and maintaining your financial records, your business will gain the enhanced ability to plan and allocate resources efficiently. 

Improved budgeting and forecasting 

By maintaining meticulous financial records, you benefit from data reliability, which would become a concern if financial records are not properly managed. 

This reliability will, in turn, enable better forecasting and budgeting capabilities, helping you save every last penny. This will also allow you to formulate growth strategies better, keeping in mind your financial health.

Increased efficiency of time and money

While tracking and managing the inflow and outflow of money, you only have to set up a system once and follow that onward. This will save you time immensely by allowing you to automate large parts of the process.

Once in place, this system will save you time and money without realizing it. Since the financial management of your business is taken care of by such a process or platform (such as doola), you have complete freedom to focus on your core business. 

Improved financial reporting

Tracking and managing expenses and income helps you with tax deductions, but it helps even more in cases of tax audits. The IRS sometimes examines the legitimacy of the expenses mentioned, and at this stage, having bills, invoices, and receipts can significantly increase your chances of availing of the deduction. 

Improved ability to seek loans and investments

One thing that investors love is solid financial bookkeeping. This gives investors confidence that the funds they allocate will be spent transparently and accountable, thus significantly increasing their chances of securing funds via loans or investments. 

Common Pitfalls to Avoid While Maintaining Your Financial Records

As straightforward as it may seem, people make common mistakes when managing their financial records. Here are the most common pitfalls you should avoid.

Not saving all the receipts

While it may seem like a minor issue, in the long run, this can add up to many receipts, ultimately resulting in poor bookkeeping of your business. To avoid this, entrepreneurs must save all receipts and records regardless of the size or significance. 

Poor organization

You need to properly organize and catalog your receipts under specific headings to avoid becoming significantly cumbersome when sorting all the receipts during the tax season. You should systematically arrange your receipts and records from the get-go to avoid stress during the tax season. 

Failing to create digital copies or backup

Generally, in the case of hard copies, every receipt and record should be uploaded directly or after being scanned. Hard copies must be stored in folders under specific labels and chronology. 

Inconsistent tracking

Another common mistake entrepreneurs make is not being consistent with their tracking. Irregularly updating the data will lead to inaccurate records and a miscalculated tax issue. 

How doola Bookkeeping Can Revolutionize Your Financial Management

We at doola understand the importance of regular and accurate financial tracking. That is why we offer a variety of bookkeeping packages with which they can track, manage, and automate their financial management. 

Book a demo today and learn how doola bookkeeping can revolutionize your business. 

FAQs

Why is it important to categorize business receipts and track expenses?

Categorizing business receipts and tracking expenses helps manage cash flow, prepare for taxes, and identify areas for cost savings. It also ensures you can claim all eligible deductions and offsets.

What are the benefits of organizing receipts beyond tax preparation?

Organizing receipts improves cash flow management, enhances budgeting and forecasting, increases efficiency, provides better financial reporting, and strengthens the ability to secure loans and investments.

What are common mistakes to avoid when managing business receipts and expenses?

Common mistakes include not saving all receipts, poor organization, failing to create digital backups, and inconsistent tracking. Avoiding these pitfalls ensures accurate financial records and smoother tax preparation.

How does proper receipt management help during a tax audit?

Proper receipt management ensures you have all the necessary documentation to support your expense claims. This can significantly increase your chances of passing an audit and availing of all eligible deductions.