Free Small Business Expense Tracking Spreadsheet

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Two people exchanging receipts and money

Small business expense tracking can be tedious, but it’s one that all companies–from “mom and pop” shops to international enterprises–must do. Fortunately, business expense tracking apps make the job easier. An app is ideal if you have a business with many employees, sales, and tax considerations.

For some small businesses, however, paying a subscription fee for an expense tracker may not be feasible in the beginning. In this case, they can use a free business expense tracker or template. While expense tracking will remain manual, it will keep their finances organized in one place. 

We’re sharing a free business expense tracking spreadsheet that you can use. You can jump to the spreadsheet here and scroll further to learn how small businesses can keep track of expenses for free or at little cost.

Why do you need to track small business expenses?

As you may know, you’re required to file taxes each year. Come tax time, no one wants to sift through old receipts to account for each expense. 

Once you start expense tracking regularly, you can eliminate such hassles. Moreover, up-to-date records ensure that you file tax returns accurately. Therefore, should the IRS audit your company, you won’t have anything to worry about. Besides saving you time, you’ll also want to track expenses to take advantage of tax deductions and better financial health.

Tax Deductions

Everyone has to deal with taxes every year–companies and individuals. You may be eligible for tax deductions for certain expenses or activities. If you qualify for a deduction, you can lower the tax amount you owe and use the savings to grow the business. 

While it may surprise you, many small business expenses qualify for tax deductions. However, only a small proportion of small business owners benefit from them. This is primarily due to inadequate expense tracking practices and not knowing how much you can save.

With reliable accounting software, you’ll have expense reports. These will give you a complete picture of your spending and tax deductions. If you’re unsure what counts as a deduction, you can review our list of over 20 tax deductions for small businesses.

Financial health

Data from the Bureau of Labor Statistics (BLS) shows that 20% of small businesses fail within the first year. This figure rises to 50% by the fifth year. But there’s a silver lining. 

Most of these businesses do not fail because there’s no market. Surprisingly, some companies make a lot of money and still fail. Some of the reasons for this include:

  • Financial mismanagement
  • Cash flow issues
  • Unsustainable growth
  • Poor planning

As you can see, all those factors are related to finances. By ironing up your expense tracking processes, you can significantly increase the chances of success for your business. You’ll be able to quickly spot unnecessary, unusual, and fraudulent activity that may bring your business down. 

This way, you can limit business expenses to necessary expenses and prevent costs from going overboard. In addition, you can learn how to read and interpret financial statements. 

What are common business expenses?

Businesses in varying industries have different expense profiles. Even still, there are expenses that almost all businesses have. In the expense tracking spreadsheet, you’ll find areas to record each of these expenses, including: 

  • Advertising and marketing – Costs associated with hiring a marketing agency or a consultant.
  • Auto expenses – If you use your car for business, you can expense repairs and mileage.
  • Bank charges – Fees and costs for a business bank account and credit cards.
  • Commissions – They will be recorded here if you pay out sales commissions.
  • Contract labor – This is for businesses that hire freelancers or contract employees. 
  • Interest – If you have a business loan, its interest is considered an expense.
  • Legal & professional – Consult with lawyers, accountants, and other professionals.
  • Merchant fees – These are costs that merchants like Shopify and Amazon charge.
  • Payroll, payroll taxes, and processing – Expenses related to paying employees and processing those payments.
  • Recruiting & HR – Costs associated with finding and hiring employees.
  • Training & Education – Expenses related to furthering your or your employees’ business education.
  • Software and tools – Many tools you use for your company are expenses (and tax-deductible).
  • Rent or lease – If you have a physical store or office, you can add it as an expense.
  • Utilities – Many utilities, including the Internet, are business expenses.

These are just a few examples. You’ll find more inside the small business expense tracking spreadsheet. 

What is the best way to track expenses for small businesses?

At this stage, you know why it’s important to track business expenses, but how do you do it? You have two options: business expense tracking spreadsheets or apps. 

1. Business expense tracking apps

The best options for business expense tracking are expense tracker apps. These solutions sync to your bank accounts and business credit cards and categorize your expenses. This eliminates most of the manual work and automates inputting the costs yourself in a spreadsheet. As a result, the only expenses you usually add manually are those you pay for in cash.

Such solutions generate expense reports in addition to maintaining expense records. These reports help you understand your spending habits and how they impact cash flow and financial health. You don’t have to set time aside for this. You can review your expenses using a mobile app while on the go. Overall, they reduce the amount of time you spend on expense records. 

Some business expense tracking apps include: 

  • Mint
  • Quickbooks (integrates with xendoo)
  • Xero (integrates with xendoo)
  • Zoho Expense
  • Expensify

To learn more about each app and if it’s a good fit for your company, you can view our guide to expense tracking apps here. 

2. Business expense tracking spreadsheets

While business expense tracker apps may be ideal, they’re sometimes inaccessible to small businesses. There may be a learning curve. Your company may not have many employees or complex expenses or the budget to afford a subscription. Whatever the reason, you’ll still have expenses to manage and report. 

Using this free business expense tracking spreadsheet is the ideal option. Expense tracking spreadsheets use standardized templates to help you track various business expenses and key details. It’s the perfect middle ground between expense tracker apps and other inadequate methods. 

Instead of worrying about how to record expenses, you’ll have a simple outline to follow. And you’ll have key insights such as:

  • The amount of money spent
  • The purpose of spending money
  • What the money was spent on
  • Who spent the money

The good thing about spreadsheets is that they give you flexibility. Along with the general expenses spreadsheets, you can have spreadsheets to report particular expenses. For example, this may include: 

  • Mileage reports, especially if you reimburse employees for mileage
  • Travel expense reports for long business trips

Although, it is ideal to keep everything in one central place. Otherwise, it becomes harder to manage and you might not have the full picture of your finances. 

While the purpose of each expense spreadsheet may vary, they’ll have similarities. These include:

  • Columns for filling in data such as expense descriptions, date, unit cost, vendor, and method of payment
  • Rows for each expense item
  • Columns with formulas that automatically calculate total expenses

In fairness, updating expense tracking spreadsheets requires commitment and can be tedious. However, if you are just starting out with a low budget, they can help you stay organized. Most entrepreneurs move to accounting software as their business grows because it will integrate with other tools like those for eCommerce stores, payroll, and inventory. 

How can integrating tax software benefit small businesses?

Integrating tax software can greatly benefit small businesses by streamlining the tax preparation process. By integrating their expense spreadsheets with tax software, small businesses can automate tasks such as categorizing expenses, calculating deductions, and preparing tax forms. This integration ensures that spreadsheet data is properly formatted and categorized, facilitating the efficient importation of data into tax software. Consequently, small businesses can save time and reduce the risk of human error when compiling year-end financial statements, estimating taxes owed, and filing tax returns. Integrating tax software simplifies tax preparation, enhances accuracy, and enables businesses to maximize their eligible deductions.

Small business expense tracking spreadsheet

You can get the Google sheet for small business expense tracking here. To use the sheet, you’ll first make a copy and edit the copy. 

When you’re tracking expenses or any finances, you’ll come across accounting terms like gross revenue, net income, and gross income. To use this spreadsheet, you’ll want to be familiar with them. 

What is gross revenue?

Along with the primary revenue stream, your business may have several sources of revenue. Gross revenue is the total of your business’s revenues over a given time period. It is not the same as gross profit. 

Gross revenue solely focuses on earnings. As such, it does not account for the expenses incurred, such as the cost of production. Therefore, tracking gross revenue is important as it shows the potential of a business to grow and generate profits for shareholders. 

Gross revenue is also known as the “top line” because it usually appears at the top of the income statement. Similarly, gross revenue is at the top of our free expense tracking spreadsheet. It’s important not to confuse gross revenue with net revenue. Along with the total earnings, the latter also accounts for expenses.

What is gross profit?

Unlike gross revenue, gross profit accounts for the costs of goods sold. To calculate your gross profit, you take the costs of goods or the cost it takes to produce and subtract it from the total gross revenue. The calculation will look like this:

  • Gross Revenue – Cost of Goods Sold = Gross Profit

What is total net income?

For this, you’ll need to calculate net income (NI), also known as earnings. It refers to the business’s total money (gross revenue) minus total expenses. Your expense items are on the left column of the sheet–marketing, bank charges, interest payments, etc. 

To calculate total net income, you must subtract all expenses from the total gross revenue or the amount earned.

  • Gross Revenue – Total Expenses = Total Net Income

In simple terms, net income is the money the business has after paying for all expenses. Keep in mind that the cost of goods sold (COGs) is often considered a necessary expense. It should also be subtracted when calculating total net income.

Total net income vs. total expenses

The two most important numbers for expense tracking are total net income and total expenses. It’s important to know how they’re related and how they differ.

Total expenses refer to the sum of all the costs your business incurs. On the other hand, total net income refers to the money that’s left once you deduct total expenses from gross revenues. Therefore, you must first know the total expenses to calculate the total net income. 

How to use the sheet

With our free expense tracking template, you won’t have to worry about building your own and figuring out the categories to include. It includes a list of the common small business expenses and sections for other expenses, gross revenues, refunds, and total net income. 

Depending on the expense you want to record, you need only find the right category and add it. The sheet will automatically calculate each month’s total gross revenue, expenses, and net income.

Every business must track business expenses. However, paying for an expense-tracking app may not be an option. Also, while tracking expenses manually using a spreadsheet is possible, you may want to focus on other business activities.

If that sounds like you, xendoo is exactly what you need. We have a team of virtual bookkeepers and accountants who can manage all your accounting needs. Moreover, you can also integrate xendoo with software like Gusto, Stripe, Quickbooks, Xero, and more.

How to Outsource Bookkeeping – A Guide

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A man in an oxford shirt looks at his bookkeeping on his laptop

Since starting your business, you’ve likely filled multiple roles–from product and customer service to bookkeeping and sales–at some point. However, as your business has grown, you may have felt like you don’t want to spend your time doing some of those tasks. 

For instance, you’ve probably asked yourself: Should I outsource bookkeeping?

Whether or not to outsource is a common question many small business owners face. Tasks like bookkeeping are ideal to hire outside help. Others like sales may be better to manage in-house. There are a few ways that you can hire a bookkeeper. Primarily, businesses choose virtual bookkeepers or local bookkeepers.

In this guide, we’ll dive into everything related to outsourced bookkeeping from what it costs to how to outsource it. You can click to go to a particular section below or scroll down to start from the top. 

When should I outsource my bookkeeping?

If your business is new and you don’t have significant revenue or budget to hire outside help, you’ll probably try DIY bookkeeping first.

However, most businesses prefer to outsource their bookkeeping, especially as they grow. These are some of the top signs that it is time to outsource your bookkeeping:

  • You’re spending several hours each week doing accounting and bookkeeping tasks yourself.
  • You plan to get funding through investors or business loans and need accurate financial statements.
  • Your books are behind, and you need to catch up.
  • You’re spending a lot of money hiring full-time, in-house bookkeepers or a local bookkeeper.
  • You aren’t sure about your current cash flow or financial health.
  • Tax season is coming up, and you don’t feel prepared to file your taxes.
  • You simply have no desire to learn bookkeeping or to do it yourself.

Why should I outsource my bookkeeping?

At first, you might be hesitant to trust an outside bookkeeper with your financial data. There are so many benefits to outsourcing your bookkeeping, as long as you choose a trustworthy CPA or bookkeeper. The top benefits of outsourcing your bookkeeping include:

Up-to-date books and more time for business

Small business owners are notorious for spending a large amount of time on administrative work, like employee scheduling, preparing payroll, and bookkeeping. It is estimated that small business owners spend 120 working days per year on administrative tasks like bookkeeping. Still, nearly 25% of businesses are behind on their books. 

Hiring a bookkeeper allows you to free up more time. With the time saved, you can focus on the tasks that excite you most as a business owner. Although bookkeeping it’s extremely important to the health and success of a business, it is not necessarily a task that most entrepreneurs enjoy doing.

Cost-effective bookkeeping

If you’ve attempted to do small business bookkeeping on your own, you already know that it can take a lot of time and money. Even if you utilize programs like Quickbooks or Xero, you can’t automate all your bookkeeping needs.

If you’ve hired an hourly bookkeeper or accountant, the cost per hour adds up fast. xendoo offers pricing plans with a flat-rate monthly fee, so you can easily budget for your bookkeeping each month.

Business loan and funding preparation

As your business grows, your bookkeeping and accounting needs grow too. If you want to take out a loan or open a line of credit, your lender will want accurate financial statements. It can take hours to do this on your own, and it might not be accurate.

Bookkeepers have experience doing this for multiple clients, so they can put financial statements together quickly in a way that’s presentable for your potential lender.

Experienced bookkeepers can also help you by:

  • Advising you on tax savings. You’ll have a better idea of what you can deduct and how to reduce your taxes.
  • Providing answers to your financial questions. Bookkeepers can help you learn about financial reports, cash flow, depreciation, and more.
  • Identifying opportunities to improve profitability. They’ll have a clear picture of where you improve your business finances.
  • Keeping you tax-compliant and secure. Bookkeepers are familiar with tax laws and other legal considerations, so you won’t miss deadlines or have noncompliance penalties.

How do you outsource bookkeeping?

There are two primary options to outsource bookkeeping–virtual bookkeepers or local bookkeepers.

Virtual bookkeepers

If you hire a bookkeeper online then that would be considered a virtual bookkeeper.  xendoo, for example, is a virtual bookkeeping service. Our team of bookkeepers works with you virtually, no matter where you a located in the United States. 

However, there are some differences between xendoo’s bookkeeping services and other virtual bookkeepers. For instance, you might hire a freelance virtual bookkeeper that performs the same tasks that a regular bookkeeper would–they just do them online. 

The drawback of hiring an individual freelance bookkeeper is that they tend to be more expensive. Like an in-person, local bookkeeper, freelancers usually charge an hourly rate vs a set monthly payment.

They also may not have as many resources as a bookkeeping firm or company. For instance, when you get a xendoo plan you also get perks like access to accounting software like QuickBooks and Xero. 

Another advantage of virtual bookkeepers is that because they work online, they tend to be familiar with different eCommerce platforms, payment processors, and other online financial services. Therefore, they can help you integrate your business banking account, expenses, and other financial data into a secure accounting system. With that, you can view your financial health, prepare for taxes, or plan for your business future at any time. 

Local bookkeepers

If you hire a bookkeeper that has an office or business location near you, that would be considered a local bookkeeper. Local bookkeepers usually charge by the hour and it tends to be expensive.

For instance, it is not cost-effective if you need to book more than one or two hours a month. This might make sense if you are booking an hour for a bookkeeping consultation a month. However, in this case, you would still be responsible for doing your own books.

If a local bookkeeper is managing your books and you have a complex business with many employees and revenue streams, it’s probably going to take more than a few hours a month. Those hours can get expensive.

In most cases, you don’t need a local bookkeeper unless:

  • You want to meet with your bookkeeper in person on a regular basis.
  • You keep your financial information in physical records only. 

Whether or not you use a local bookkeeper is based on your preference. Today, most accounting and bookkeeping tasks are performed online anyway. Therefore, the majority of businesses prefer online bookkeeping, because it’s more accurate, cost-effective, and easier.

How much does outsourced bookkeeping cost?

The size of your business and the number of monthly expenses you incur play a large role in the pricing for outsourced bookkeeping services. To get a better idea of how much outsourced bookkeeping costs, let’s compare it with some other bookkeeper options.

In-house bookkeeper cost

An in-house bookkeeper is usually considered a full-time employee, which means they would get a salary and benefits package. According to Salary.com, the cost to hire a full-time entry-level bookkeeper is $45,446. That is just the base salary and doesn’t include benefits or bonuses.

Of course, the cost rises in cities that have a high cost of living. It also increases when hiring bookkeepers with more years of experience. For example, in San Francisco, the living wage is higher. The average annual salary for business and finance professionals is $84,198, according to MIT. 

Most small businesses don’t have enough bookkeeping needs to justify paying a bookkeeper year-round for their services. They may consider a freelance bookkeeper or an hourly bookkeeper, however, that might be just as costly.

Local or freelance bookkeeper cost

If you look at any freelance marketplace you’ll find that the cost for freelance bookkeepers ranges widely.

It’s not unusual for the hourly rate for freelance bookkeepers to range from $21 per hour to $60 per hour.  However, more experienced freelance bookkeepers will charge upwards of $75 or more per hour, especially if they are doing complex bookkeeping or accounting tasks.

If your business has a lot of bookkeeping needs, a local or freelance bookkeeper who charges by the hour usually is not cost-effective. When you only get an hour of their time, you probably won’t get all your bookkeeping questions or concerns answered.

Outsourced bookkeeper cost

Of all the bookkeeping options, outsourcing tends to be the most cost-effective for small businesses. This is because you’re not hiring a full-time staff member or being charged an hourly rate.

Outsourced bookkeeping services usually charge a set monthly fee. These are popular with small businesses because the bookkeeping services come in packages based on your needs. 

It’s easier to budget for a monthly cost that’s the same each month. Plus, it costs half of what you could end up paying for an hourly bookkeeper. That’s why xendoo offers this pricing structure with a variety of package options to fit your specific company’s needs. 

How does outsourcing with xendoo work?

If you choose to go the outsourced bookkeeping route, you’ll be paired with a dedicated bookkeeper. Plus, because we are a team of financial experts, you’ll also get access to a CPA and an accountant. 

Your expert bookkeeper will set up a digital accounting system for you if you don’t already have one. This means that we’ll take your sales and revenue data, expenses, payroll, etc, and put it all together in one financial dashboard. You’ll be able to access it anytime–desktop or mobile–and get monthly reporting with balance sheets and profit-loss statements. If you’d like to learn more, you can schedule a consultation with our team here.

 

The Top 5 Benefits of Catch Up Bookkeeping

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Young cafe owners sitting at table, working on their catch up bookkeeping

Whether they coach chess players or sell organic puppy food online, every small business owner shares a common driving force: a passion for growing their business. Increasing sales and gaining new customers is one part of the equation. Consistent bookkeeping provides the financial insight needed to strategize for long-term success. With so many obligations resting on the business owner’s shoulders, it can feel like there are not enough hours in the day to accomplish every task, and eventually the books may fall behind. 

Even if the books are only behind a few weeks, up-to-date records are crucial for the financial well-being of every business. Catch up bookkeeping accelerates business growth by increasing financial visibility, which enables business owners to make decisions based on accurate information and remain tax-compliant throughout the year! In this blog post, we are exploring the top 5 benefits of catch up bookkeeping!   

Reliability in Your Opening Balance

The Opening Balance is the amount of money in your bank account at the beginning of a new financial period, such as the start of the month. Be aware that your bank account does not necessarily reflect the exact amount of cash that is available to spend. For example, if your Opening Balance states that you have $50,000, but $20,000 worth of checks have not cleared yet, the actual balance is $30,000. The best practice is to consult your updated accounting software or financial statements, which provide insight into your true financial position.

The financial statements report revenue, expenses, and profitability, all of which contribute to the Opening Balance. They also guide decision-making and reveal opportunities for business growth. The more up-to-date your books are, the more reliable your financial statements (and Opening Balance) will be! 

If your bookkeeping is behind, there will be little to no financial data for that time period, which means you will not know your true Opening Balance for today. For example, if your account was reconciled in January, but February was skipped, the Opening Balance would be incorrect for March. This could skew your numbers going forward, and costly choices could be made based on inaccurate data. This could also affect future bank account reconciliation, as well as the balances in your revenue, costs, and expenses. It is a vicious cycle.

Catch up bookkeeping corrects these issues and provides clarity and accuracy in your financials. Once your books are caught up, keeping them up-to-date becomes second nature.

Financial Accuracy Through Bank Account Reconciliation   

A bank account reconciliation is performed to confirm that your accounting records match the information in your bank account. It is an opportunity to identify and correct any bookkeeping errors before the financial statements are finalized, as well as detect and prevent fraudulent activity in your bank account. Bank account reconciliation also ensures that you are accurately reporting your income to the IRS. The best practice is to reconcile your bank account once a month. 

Proper bank account reconciliation can only be accomplished when the books are up-to-date. By getting your books caught up, you can ensure the reliability and accuracy of your financials each month. 

 

Cash Flow Management

Catch up bookkeeping can have a significant impact on cash flow. When your books are caught up, you can pinpoint how and when cash enters and leaves your business each month. This delivers a deeper understanding of your cash needs, so you can create a plan for cash flow management. 

For example, as your books are caught up, you may uncover past due invoices, or find that you are sending out vendor payments before you receive the cash needed to cover them. 

With this insight, you can monitor your Accounts Receivable to ensure you are paid in a timely manner going forward, and find solutions for the timing of your own payments. You can also forecast future cash needs to be confident you have what you need for continued operations.   

Click here to learn more about cash flow.  

Insight into Net Income

Keeping your books up-to-date plays a vital role in calculating your bottom line, or Net Income, which is the profit that remains after all costs and expenses are subtracted from revenue. In order to know your true Net Income, all business expenses must be accounted for through accurate and timely bookkeeping. This understanding of your Net Income provides the opportunity to increase your bottom line. 

Getting your books caught up is also essential when applying for loans. Creditors and investors examine Net Income when deciding to invest in a business, as it highlights the business’s ability to pay back loans efficiently. Catch up bookkeeping determines your bottom line, so you can understand and increase the profitability of your business, meet loan requirements, and secure funding for your next venture!     

Click here to learn more about Net Income.   

Tax Compliance

As tax season draws closer, a concern that many business owners have is under or over reporting their earnings, and missing out on deductions. They may also experience a back and forth with their Tax CPA over missing documents and gaps in their financials. Breathe a sigh of relief – catch up bookkeeping takes the headache out of tax season!

By getting (and keeping) your books caught up, you can identify the deductions you qualify for, maximize your tax return, and stay compliant all year long! 

Get Your Books Caught Up with xendoo

Behind on your bookkeeping? You are not alone! 25% of business owners are behind on their books. Get a fresh start with catch up bookkeeping services from xendoo, so you can take your time back and focus on the future of your business. 

Let’s chat! We would love to get to know you and your business. Click here to schedule a free consultation.

The Top 8 Expense Trackers for Small Businesses

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tracking business expenses on paper

tracking business expenses on paper

Tracking business expenses is one of the smartest things you can do to take control of your company’s finances. With better organization, you’ll find that your business is more streamlined and profitable, and you’ll be dealing with fewer headaches when tax season rolls around. 

If you ever find yourself facing an IRS audit, proper tracking provides the documentation you need to validate your income and deductions.

Thanks to the many business expense trackers available, tracking small business expenses is easier than ever. You’re probably already familiar with some of the top choices on the market, but let’s take a closer look at the top 8 expense trackers for small businesses.

Expensify

Tracking business expenses often starts with saving your receipts. Expensify allows you to scan your receipts and import the details into the app. You can then organize expenses by category and create reports to highlight trends in your company’s spending patterns.

Employees can use the app to easily send reimbursement requests to supervisors and business managers, and staff will appreciate the rapid, next-day reimbursement feature offered through the app.

Expensify provides an ideal receipt-capturing solution for tracking expenses on the go, and the app can even handle foreign currency. You can also sync your company credit card, so company expenses are pulled in automatically.

 The free version of Expensify allows for a certain number of receipt scans, after which the service costs $4.99 per month.

Mint

Mint is a great free tool for independent contractors and freelancers. Mint lets you scan your bank and credit card statements and upload them directly into its expense-tracking platform.

The app lets you set budgets and financial goals, as well as track your credit score. Mint also allows users to set alerts and reminders for big purchases or remind them of due dates for time-sensitive expenses such as utility bills.

Admittedly, Mint’s features are limited, but this system can be ideal for smaller companies or the self-employed.  

QuickBooks

As a small business owner, you may already be familiar with Intuit QuickBooks as an accounting software platform. Admittedly, QuickBooks is a powerful tool and can be used to manage literally every financial aspect of your business. You can use QuickBooks to perform such processes as:

  • Running payroll
  • Accepting online payments
  • Tracking bills and expenses
  • Tax planning and preparation

The QuickBooks app also allows you to scan your receipts and import this data into the system. You can later use this data to generate expense reports and track sales tax. Business owners can expect to pay at least $12.50 per month for QuickBooks’ basic package, though this price will rise with the addition of advanced features.

Few tools are as powerful as QuickBooks, but that tends to be a double-edged sword for most small business owners. QuickBooks can be ideal for those who already have some knowledge of how to use the software or for businesses that have a team devoted to tracking business expenses and keeping up with the books.

Excel

Sometimes, the tried-and-true method works best. Microsoft Excel can be a simple, straightforward way to manage your company’s expenses without the bells and whistles of other tracking systems on this list.

The program already contains bookkeeping templates that you can start using for your small business, with spaces for recording income and expenses. Excel users can take advantage of automated formulas to perform calculations with the click of a mouse.

The data in your Excel spreadsheet can easily be migrated to other programs to allow you to create reports and share data with business partners and lenders or simply monitor your company’s finances over a long period.

The flipside to Excel is that it offers no receipt-scanning capabilities or other advanced features. This limit means that you (or your employees) will have to manually enter your expenses as they occur, which increases the possibility of data being overlooked or entered incorrectly.

xendoo

As a small business owner, tracking business expenses can become a distraction from your core business activities. So why not outsource your books to a team of financial professionals? 

This approach, of course, is the philosophy of xendoo, who can provide expert-level online bookkeeping services for a fraction of the cost of an in-house accountant.

How can xendoo help you keep track of your expenses? First, the xendoo team understands that busy entrepreneurs can sometimes get a little behind. It’s not unusual for business owners to have an envelope full of business receipts that haven’t been recorded in the books.

Getting behind in the books once in a while is perfectly understandable, but it can keep you in the dark when it comes to your company’s health, and it can become a total nightmare when you need to file taxes. 

xendoo’s catchup bookkeeping services can help you catch up on your expenses, ensuring that your books are accurate and up-to-date.

But xendoo can help with much more than this. When you partner with xendoo, you’ll gain access to a team of experts who can provide ongoing services to manage all of your bookkeeping needs. 

This service can be a great help when it comes to tracking business expenses, and the xendoo reporting tools allow you to keep your finger on the pulse of your company.

Wally

Wally is a budgeting app that has largely been marketed toward millennials. The eye-catching, colorful graphics and social networking feature mask the true power of this tool. Wally uses artificial intelligence AI to integrate your financial accounts and provide insight into your spending habits.

This tool has largely been marketed for individual use, offering young adults a snapshot of their financial priorities and helping them develop better financial discipline. But the features of this app could easily be translated to the world of business and may be great for freelancers and solo entrepreneurs.

That’s not to suggest that you can’t use Wally with teams. Wally allows you to set up groups of users and pool data, which could be useful when collaborating on projects and tracking business expenses. Wally also enables users to set due dates and send reminders, ensuring your bills are always up-to-date.

The AI reporting features could also highlight trends and patterns in your company’s finances, providing insight that can help you refine your strategy and adjust spending for future goals and projects.

Wally offers a free version, though its advanced account-linking features will require a monthly fee, starting at $3.99 or $32.99 when billed annually.

Goodbudget

As the name suggests, Goodbudget is a software platform that allows you to create and manage a budget. Goodbudget relies on what’s called “the envelope method.” This method means that you’ll develop a series of expense categories and then deduct your expenses from the appropriate category as they occur.

For example, if you have an “envelope” for supplies, you would set a monthly budget for that envelope, then subtract from that category the next time you buy printer ink. The goal, of course, is to stick to the budget for each individual envelope.

This approach makes Goodbudget one of the simplest tools for first-time users. Suppose that you’re new to the business world. In that case, Goodbudget’s intuitive “envelope” system can help you think more carefully about how to categorize your expenses and how to manage the budget of each individual category.

Unfortunately, this might mean that the app requires more attention than other services on this list. You’ll not only have to manually enter your expenses as they occur, but you’ll also have to input data into respective categories. 

Similarly, reporting features are fairly minimal, which means that you won’t be able to spot trends when tracking business expenses. This minimalism makes Goodbudget a great tool for solo entrepreneurs and freelancers but a bit lacking for growing companies.

Zoho Expense

Zoho has already been a big name in the small business community, offering a library of great tools for entrepreneurs. Zoho Expense is their solution for tracking business expenses, with some great features that make it ideal for companies of any size.

Zoho Expense allows you to scan receipts and input data as expenses occur, and you can use the built-in GPS to track mileage for your business trips. This design makes it great for business owners or employees who are on the go, and you can also set per diem rates for employees.

The reporting features are also quite advanced, offering you the ability to pin receipts to expense reports and sort expenses by category. 

The app also syncs with business credit cards to keep track of all of your business transactions. If you use other Zoho products for your business, you can integrate data to provide a powerful financial tool for your small business.

 Zoho Expense starts at $5.00 per user per month, though you’ll need a minimum of three users to deploy their service.

Do More than Keep Track

Tracking business expenses is the foundation of a good financial strategy. That’s why xendoo offers cutting-edge solutions for today’s modern businesses. 

Our accounting services can help you stay caught up with your books and provide advanced analysis to help you optimize your business. Experience our free trial, and see why countless business owners have trusted xendoo for their accounting needs.

Tax Savings for Small Business Owners: Bonus Depreciation and Section 179

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A business owner working with a laptop and calculator to determine his tax savings

When making a major purchase for your business, you are expected to spread the tax deduction out over the lifespan of that purchase, which provides small tax savings over the years. But, why wait? Business owners can take advantage of Bonus Depreciation and Section 179 to invest in their businesses, resulting in an enormous tax break! 

In this blog post, we will explain how the deductions work, and how you can use them to maximize your tax savings. 

How Do the Deductions Work? 

Section 179 allows you to deduct the full purchase price from a qualifying new or used business asset, while Bonus Depreciation allows you to deduct a percentage. Currently, Bonus Depreciation is being offered at 100%, so both options will allow you to write off the entire cost of your purchase in the same year. 

There are certain criteria that the asset must meet to qualify for the deductions:

  • Tangible Items. This includes, but is not limited to, physical items such as office furniture, equipment, computer software, and business vehicles exceeding 6,000 pounds. 
  • Interior Improvements. While land and buildings do not qualify for Section 179, interior improvements do. Examples include, but are not limited to, fire alarms, security systems, roofing, and HVAC. To qualify for Bonus Depreciation, qualified improvements must have been completed after the building became operational. Building enlargements, elevators, escalators, and any internal structural framework changes are ineligible. 
  • Used for Business. Assets must be used for business purposes more than 50% of the time to qualify for Section 179 and Bonus Depreciation.

There are many major purchases that business owners can make, and claim these deductions. If you have made or plan to make a major purchase for your business and are unsure if it qualifies, speak with an online accountant at xendoo to learn more. 

Are There Limits to the Deductions?

For 2021, Section 179 is limited to a maximum deduction of $1,050,000, and the total equipment purchased by a business cannot exceed $2,620,000. Bonus Depreciation is currently being offered at 100%, but is scheduled to decrease to:

  • 80% after December 31, 2022 and before January 1, 2024.
  • 60% after December 31, 2023 and before January 1, 2025.
  • 40% after December 31, 2024 and before January 1, 2026.
  • 20% after December 31, 2025 and before January 1, 2027.

If you are considering utilizing Bonus Depreciation, now is the time to do so, as the percentage you can claim will start to decrease soon. 

Section 179 allows you to split the deduction over time. For example, you could write off half of the purchase up front and spread out the rest over the next few years, allowing for greater flexibility on your deduction. It should also be noted that your business must have a taxable profit to claim Section 179, as the deduction is limited to your business’s net income. 

For example, if you have a net income of $60,000, and you purchased $70,000 worth of equipment, the deduction will be limited to $60,000. You can carry the remaining $10,000 deduction into the next year, as long as your income allows for it.

Bonus Depreciation requires that you deduct the entire cost within the year. However, there are no income restrictions on this deduction, unlike Section 179. Even if you make a purchase that exceeds your net income, there will not be a limit to the deduction, as it covers 100% of the purchase.  

Business owners can claim both Section 179 and Bonus Depreciation, but Section 179 must be taken first. They must also be applied to different purchases. For example, you could claim Section 179 for a business vehicle, and Bonus Depreciation for office furniture. Consult with one of xendoo’s online Tax CPAs to discuss all your options.

Maximized Taxes. Minimize Stress. 

Bonus Depreciation and Section 179 can provide substantial tax breaks for your business. The xendoo team is here to help you maximize your tax savings with these incredible opportunities! 

Let xendoo handle the hassles while you put more money in your pocket and take your time back. Our expert bookkeepers, accountants, and CPAs can help you navigate your financials throughout the year!

Schedule a call with one of our online accountants to get started.

Business Lessons from a Breast Cancer Survivor: An Interview with xendoo COO, Julia Aquino

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A group of breast cancer survivors hugging and smiling at each other
Julia Aquino, xendoo COO, poses with the Breast Cancer Awareness Month pink ribbon.

Julia Aquino, xendoo COO, recognizes Breast Cancer Awareness Month.

As we begin Breast Cancer Awareness Month, we spoke with xendoo COO and breast cancer survivor, Julia Aquino. She was diagnosed with breast cancer in 2012. She knew that she needed a deep understanding of the disease in order to make the best decisions for her health, while also running a successful business. 

 

Armed with knowledge and clear goals for recovery, she survived and thrived through treatment. In today’s post, she shares what her experience with breast cancer taught her about business. 

Make a Plan

When Julia was first diagnosed with breast cancer, she dove into researching the disease. She learned how cancer was typed, what the terminology meant, and how the medication worked. She understood her family history, and the stage she was in. This knowledge helped her to coordinate with her doctor to create an effective plan for care and survival. It kept her focused and determined as she fought the disease. 

 

Having a business plan provides the same focus and determination to meet your goals. When you pair that determination with knowledge of your industry, audience, and competition, you can reduce your competitive risks and navigate difficulty with confidence. Your business plan is your roadmap that helps you take focused action and make informed decisions as your business grows.

Know Your Numbers

There are many numbers associated with cancer. Your staging, your white blood count (WBC), tumor marker levels, hormone levels, and FISH levels, to name a few. It can be very intimidating. Taking the time to understand your numbers and their significance will provide you with factual information so you can understand where you are, and what options you have. It reduces fear-based decision making, and brings clarity to an otherwise overwhelming situation.

 

The same idea applies to business. When you know your numbers, you can make better decisions, based on facts. Sometimes we don’t want to look at our financials because we do not understand them, or because they show we are not as profitable as we would like to be. However, there is always information that can guide our actions, and help us find solutions. Take the time to understand your key metrics and trends, measure the outcomes of the actions you take, and adjust behaviors when needed. The financial insight gained from this review can be used to effectively address issues and strategize for long-term success.

Find a Support System

Those who are battling breast cancer have a lot on their shoulders; they balance work, their lives, their hopes and fears, and their health. It can be physically and emotionally draining. The right medical team, supportive friends and family, and a healing environment can provide comfort in the most difficult moments. Finding a support system that encourages them to keep moving forward makes all the difference in the world. 

 

Likewise, business owners juggle multiple roles, including leader, sales, customer service, and even bookkeeper. Shouldering all of those responsibilities can become overwhelming and exhausting. Business owners need a supportive team who complements what they lack experience in, and takes the stress off of their plates. 

 

You do not have to do it all on your own. Build a supportive team that covers all the bases, so you can do what you do best – growing your business. In discouraging moments, your team will push you to dust yourself off and refocus on your business goals. In moments that you need to step back, they will be happy to step up to keep the business running. When you are ready to jump back in, remember the true power you have, rely on the support you are surrounded with, and keep moving forward. 

Celebrate Your Victories 

To all who are battling breast cancer, we support you and are amazed by you. You work hard every day and fight the good fight, so take time this month to remember your strength, honor your courage, and celebrate every victory, no matter the size! Every step you take moves you further into the mindset of “I can and I will”.

Watch the full interview with Julia below:

Questions to Ask When Looking for a CPA

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An Amazon sellersets up her accounting reports on her computer

Running your own business can be tough. Between handling staffing issues, overseeing the procurement of essential resources, and planning your next marketing campaign, you might be stretched thin — not to mention all of that dreaded accounting work that you have to do to keep your books up to date!

Like many other business owners, you might have considered using professional CPA services. Partnering with a certified public accountant is a great way to avoid tax woes and maximize the profitability of your business. However, before taking that step, it’s useful to address some fundamental questions to ensure readiness. The “3 questions to answer before you start a business” can provide valuable insights into this process.

With this in mind, we’ve outlined 5 questions to ask when looking for a CPA. By using the information below, you can ensure that a CPA is the right fit for your accounting needs.

What Types of Businesses Do You Typically Work With?

When you’re inquiring about CPA services, this question should be at the top of your list. While the idea of working with an accountant who has decades of experience in finance may be appealing, it is vital to make sure that the professional you choose can fully understand the unique needs of your industry.

For instance, let’s say that your organization is in the eCommerce space. Perhaps you have narrowed your search for CPA services to two top candidates. One has 20 years of experience but has never worked with an eCommerce store before and the other only has five years of experience but has primarily served online retailers. 

In general, the less experienced CPA may be better suited to handle your accounting needs, due to their industry-specific experience.

Do You Have Experience with the IRS?

While discussing the types of clients that a CPA has worked with in the past, you should also inquire about their experience with the IRS. 

Tax laws are ever-changing, which means that you need CPA services that can keep up. If your prospective accountant lacks experience with the IRS, then you may want to continue your search.

Another option is to hire a CPA to oversee bookkeeping responsibilities and an EA (enrolled agent) to deal with tax concerns. However, this will require you to vet and hire two separate entities, which can quickly add up. 

The better solution? To partner with an accounting firm that offers both tax filing and CPA services. This will be more affordable and will also ensure that all of your company’s financial needs can be managed by a single entity.

How Frequently Do You Communicate?

Like any other partnership, it is important to establish clear expectations when seeking CPA services. Before deciding on an accountant, find out how frequently you will be able to communicate with them. 

Some accountants may only reach out monthly or quarterly. More involved partners will provide you with weekly or monthly reports and will contact you periodically throughout each quarter.

Make sure that you are satisfied with the frequency and depth of communication. The last thing you want is to hire an accountant to provide CPA services, only to find that you can’t get a hold of them when an issue arises.

Do You Rely on Third-Party Accountants?

If the firm that you partner with outsources work to third-party accountants, this will impact the frequency and quality of communication. We recommend asking upfront whether the accountant will be outsourcing work related to your business. 

While there is nothing wrong with outsourcing CPA services, it is important that the provider is transparent.

How Many Hours Will You Spend on My Business?

Asking this question can help you to determine two things. First, will the CPA provide your business with the attention that it deserves? Secondly, how much are those accounting services going to cost you? 

For now, we will only focus on that first component of this question.

Ideally, you want your accountant to spend about ten hours a month on your business, if not more. Of course, this will depend on several factors, such as the CPA services that you request and the complexity of your organization. 

If you only need tax return services, then this number will be much lower. Conversely, if you hire a CPA to perform tax return, accounting, and bookkeeping services, then they may spend hundreds of hours per year on your business.

CPA services are often designed to be scalable so that you can tailor them to the needs of your company. 

In the past, an accountant was viewed as a numbers cruncher. The expectation was that they would assess your books, run some numbers, and ensure that all financial records were accurate.

However, quality CPA services involve much more than just making a series of complex calculations. The best accountants will use numerical data to provide information about your company’s performance overall. They will also take the time to explain what the numbers mean so that you can make informed business decisions.

How Much Do You Charge?

So how much does an accountant cost anyway? The answer is “it depends.” When inquiring about the costs of CPA services, you should not only ask how much they charge but also what billing format that they use. 

There are three primary billing formats that are used by accountants, which are:

Hourly Rates

Traditionally, CPA services are billed by the hour. The more complex your books are, the longer the accountant will need to spend on them. As you might imagine, this can make it quite difficult to calculate the cumulative costs of accounting services. This problem is compounded by the fact that hourly rates vary greatly among bookkeepers and CPAs.

For example, the average rate for a bookkeeper ranges from $30 to $90 per hour. CPA services are much more costly, with hourly rates fluctuating between $150 and $450.

When discussing costs, ask what the firm charges per hour. If their rates are near the top of the spectrum and your books are way behind, expect to pay several thousand dollars for the first month of services alone.

Per Engagement Fees

Depending on your experience with bookkeeping and the complexity of your business, you may only need CPA services for large projects, such as your annual tax preparation. 

In these instances, accountants generally charge flat fees. These rates may fluctuate from a few hundred dollars for a simple tax return to as much as $5,000 for a comprehensive financial audit.

Monthly Flat Fees

Perhaps the best option for small businesses is a CPA service that charges flat monthly fees. These expenses are extremely easy to work into your budget and often cost far less than an accountant who charges by the hour.

Usually, accounting firms that offer flat monthly rates have several levels of service. These tiers are divided based on your company’s monthly expenses. For example, businesses that have $20K in monthly expenses will be charged less than an organization with $80K in monthly expenses.

What Accounting Software Do You Have Experience With?

Our final question can reveal a lot about your prospective accounting partner. We are not encouraging you to choose your CPA services provider based solely on what software they use. Instead, the goal here is to find out whether they are using the latest technologies to maintain your books or if they are relying on outdated manual processes that are more likely to introduce errors.

When answering this question, the CPA firm should be able to provide you with a very nuanced answer. They should confidently answer your question while also explaining why they use the technologies that they do. 

Take this a step further and ask them how these particular programs will benefit your business. The CPA should clearly outline how the software they use will add value to your organization.

You should also find out which online bookkeeping features their preferred programs include. Comprehensive CPA services should include online bookkeeping tools that are easy for you to use. These tools should also provide valuable insights into your company’s financial health.

Lastly, find out whether they offer a free demonstration or trial. While any accounting firm can talk up their CPA services, only a select few have the confidence to offer a trial period. 

Once you have had an opportunity to interact with the software, you will know if it is the right match for your company.

Accountant CPA Services from xendoo

Even when you know what questions to ask, finding the right online CPA services for your growing business can be tough. Thanks to xendoo, that is no longer the case!

Our firm offers a full suite of online CPA services for small businesses, including tax return processing, accounting and booking solutions, and much more. 

Concerned that your books are too far behind? Don’t worry, we can help with that, too! xendoo’s “Catch Up” services are designed specifically for businesses that have fallen a few months (or a few years) behind.

xendoo can handle all of your online CPA needs so that you can stop thinking about the past and start focusing on your future. We even provide a convenient free trial so that you can see our solutions in action. Contact us today to learn more! 

Celebrating Women’s Small Business Month: Thoughts from xendoo CEO and Founder, Lil Roberts

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A female small business owner smiles inside her boutique shop

National Women’s Small Business Month celebrates women’s achievements in business, and highlights what they bring to their communities as small business owners. We took a moment to interview xendoo founder and CEO Lil Roberts, to get insight into what it takes to be a successful entrepreneur, and the importance of women leading in business. 

Build Up Your Team

What encouragement do you have for women who are in male-dominated industries? 

Shift your mindset. Do not let who dominates the industry define your role within it. Succeeding in business is all about excelling at what you do best, and building up a team that compliments the areas that you lack experience in. A multifaceted team is what makes a business thrive. When your team is growing their skills and knowledge, when your customers are happy, that is where you will find true success in your business.

It is crucial to focus on the problem that needs to be solved, and build a team that is as passionate about solving that problem as you are. That is what success looks like in every industry, no matter who it is dominated by. 

Inclusive by Nature

What is the importance of women leading in business?

Lil smiled and recalled a moment in which she had the opportunity to speak to Frances Frei, Senior Associate Dean for Executive Education at Harvard Business School. Frei shared her experience of solving problems with a team of women and immigrants, referencing studies that prove that when women lead, everyone wins. That is not to say that people and businesses cannot thrive under male leadership – they do. It simply highlights that women tend to be inclusive by nature, and adept at empowering those around them to do and be their best. This leads to the creation of supportive, passionate teams and therefore, successful businesses. 

Hats Off to You 

To all female business owners and entrepreneurs, we are rooting for you. Happy National Women’s Small Business Month from your friends at xendoo! Take time to celebrate your business and your amazing team this month. Focus on what you love – growing your business. xendoo has your online bookkeeping covered. 

Schedule a free consultation with one of our accountants. We would love to get to know you and your business, and partner with you as your bookkeeping, accounting, and tax team! 

 

Watch the full interview with Lil below:

How Do I Pay Myself and My Taxes as a Sole Proprietor?

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Asian female business owner, working on her laptop in her art studio

Where to Begin?

Businesses are created because business owners have a passion that needs to be pursued.  They may be changing the world and even their own lives. Payroll, however, is most likely not their passion. Yet, every business owner faces the unique challenge of figuring out how to pay themselves.

Paying yourself as a sole proprietor can feel daunting. How much do you pay yourself? How do taxes factor in? Unless you have a side hustle as a financial advisor, it can be difficult to know where to start.

Self-Payment, Simplified

Breathe a sigh of relief. Paying yourself as a sole proprietor is not as complicated as it seems. Tax filing is simplified too! In this blog post, we will walk you through paying yourself as a sole proprietor!

 

How Do I Pay Myself?

You can pay yourself as a sole proprietor by taking an Owner’s Draw. An Owner’s Draw differs from a regular salary in that you can take money from your earnings as needed. Depending on how well your business is doing, you can take more or less, allowing for flexibility in your payments.

If your business is profitable, start by subtracting liabilities (any debt your company owes) from assets (items of value the company owns that will provide benefit in the future). The remaining amount is referred to as ownership equity, which is what you will take your draw from. Once you decide on an amount to take (more on that in a moment), it can be transferred from your business bank account to your personal account.

Because the Owner’s Draw is taken from ownership equity, it reduces the funds that can be used for the business. Sole proprietors must balance how much they need to support themselves and what their business needs to thrive.

How Much Do I Pay Myself?

To set an appropriate payment for yourself, you have to determine your projected profits. To estimate how much you can draw and when you must:

  • Set up a separate business bank account. As a sole proprietor, you do not need to incorporate or register your business. The business name will default to your legal name unless you file a DBA (doing business as), which allows you to operate under a different name. Once your DBA is set up, you can open a business bank account. This ensures that your personal and business expenses stay separate, and creates an accurate picture of your business’s finances.

 

  • Keep your books up to date. Keeping detailed records of your income and expenses will help you identify when cash flows into and out of your business, and how cash flow may change over time. An online bookkeeping service will be able to take this task off your plate, saving you time and stress. You will also receive monthly reports that give you actionable insights to help you make the best decisions for your business.

This will help you determine your projected profits and when you should take your draw. You can start out by paying yourself only what you need to meet your basic needs until your business breaks even. From there, you can increase your pay to your “market value”. You can increase your pay again once your business is producing consistent profits. How often you choose to draw is up to you. Some may follow a bi-weekly schedule, others may draw as needed. It ultimately depends on your personal preference.

How to Pay Your Taxes

Sole proprietorships are considered pass-through entities, meaning the IRS views your business, personal assets, and liabilities as one and the same. Because of this, you are only required to file a personal tax return. Income and expenses related to your business are accounted for on your individual Form 1040, Schedule C.

While the Owner’s Draw is not subject to federal or state income tax, it is also not expense-able. It will appear under the total net income of the business, which is taxable. Be aware that sole proprietors are required to withhold self-employment taxes, which contribute to Social Security and Medicare. As of right now, the self-employment tax rate is 15.3%.

So, how can you maximize your tax savings? Business tax preparation and filings are included with almost all of our packages! Your online Tax CPA takes care of filing your Schedule C that goes along with your personal tax return to itemize business deductions.

xendoo is Here for You

The good news is that you do not have to figure it all out on your own. xendoo Online Bookkeeping is here to help! We move at the speed of business, so you can make informed decisions faster – like deciding how much you should pay yourself as a sole proprietor! Get started with a free trial.

Ready to take the next step? Schedule a free consultation with a xendoo accountant today!

 

Want to learn more? Learn the difference between the business entity types here. 

 

 

Cash Flow vs. Profit: Understanding the Difference

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An eCommerce seller adds items to her online store.

A real estate records her numbers for the week on a laptop,

When you’re running a business, keeping track of all of the financial terms can be enough to give you a headache! But two of the most important terms that will affect you are your cash flow and your profit.

Cash flow refers to the net flow of cash in and out of a business, while profit indicates the amount of money that’s left over after all of the expenses have been paid. 

A business can be very profitable while having poor cash flow. The opposite is also true — a robust cash flow doesn’t mean a business is necessarily profitable. Investors and business owners alike use these important metrics for things like deciding when to invest or what business strategies should be used. 

It’s especially important for businesses to consider and calculate the demands of cash flow vs. profit accurately. Accurate bookkeeping is essential for both forecasting cash flow and calculating business profits, regardless of the size of your business. 

The Difference Between Cash Flow and Profit

To manage your business effectively, it’s a good idea to have a firm grasp on business cash flow vs. profit. As a business owner, you need to not only understand the differences between the two terms, but also to be able to leverage both to your advantage. 

Cash Flow

Cash flow consists of all money that comes in and out of your business over time. Positive cash flow happens when there is more money coming in than going out, while negative cash flow means that there is more money going out than coming in. 

However, there are certain things not included in business cash flow, which include:

  • Money owed to creditors
  • Money in the bank 
  • Credit from suppliers

Business cash flow is used as a metric to determine the health of your business. Lenders and investors may use it to assess how well your business is doing. 

Profit

Put simply, business profit is revenue minus expenses; it is also referred to as “net income.” 

When it comes to calculating business profits, there are two types of profits:

Gross Profit

Gross profit is the profit of your business after deducting the costs it takes to provide goods and/or services. 

Net Profit

Net profit is the profit after everything — including taxes and operating expenses (such as payroll, rent, utilities) — have been deducted.

Cash Flow vs. Profit:  Which is More Helpful for Understanding Your Company’s Health?

When it comes to business cash flow vs. profit, which is more helpful for understanding the health of your company? 

Many business owners — along with investors — want to know the one metric that will determine the health of the business so they can decide the direction to take with their business strategies. Unfortunately, there isn’t a simple answer to the business cash flow vs. profit question because both cash flow and profit are important to the health of your business, albeit in different ways. 

Business profit illustrates the immediate and short-term success of your business. Alternatively, cash flow can be used to more accurately determine the long-term financial outlook of your company. 

To be successful in the long run, a business needs to maintain both positive cash flow and profit. The critical difference between business cash flow vs. profit is time.

Understanding how these two interact can help you to make better business decisions. 

Understanding Cash Flow

Obviously, every business desires to increase sales; however, if cash flows do not increase at the same rate as your sales, you can find your business actually running short on cash. 

For example, for a business, selling more products often means spending more cash (an outflow of cash) to buy the products to stock the shelves or inventory; however, the cash inflow from sales may not be immediately available for use.  

Business growth is important for profit. Though it seems contradictory, growing your business can result in cash flow shortages. For example, when growth is high, a business may accept more orders but not have enough cash to produce and deliver them. 

Cash flow is the lifeblood of any business, so it is important to manage your cash flow carefully. There are several options available for managing small business cash flow, which we’ll explore in depth below.

Delay Cash Payments

Delaying cash payments to suppliers reduces the immediate need for cash. For example, when you’re purchasing products, you may negotiate with the supplier to pay a certain percentage upfront and then pay the remaining balance within a certain amount of time, say a month or six weeks. 

The advantage to this kind of arrangement is that you don’t have to put up all the cash upfront to get the product, but you are in effect borrowing against your future business because you will have to pay out when the delayed payment comes due. 

Cash Collections on Previous Sales

For various reasons, you may not immediately receive the cash from your sales upfront. Similar to delaying payments to a supplier, there may be a delay in receiving cash from the products you sell and deliver. 

For example, cash from June sales may not be available until July. The risk of this is that you could be short of cash in June and not have enough to meet all of your outflow needs for that month, even though June was a busy month. 

Raising Capital

If you do not have sufficient amounts of short-term cash, raising capital may be an option. One way to raise capital is to borrow money. If your business is big enough, you can issue stock, which means that an investor gives you cash in exchange for purchasing a piece of ownership of your company. 

If you are under pressure, you may feel compelled to accept a loan with a higher interest rate than you’d like or sell more ownership than you would prefer.

Both these ways of raising capital have downsides, which makes raising capital the least attractive cash flow management option. Borrowing money means that you will have to pay it back in the future, often along with interest. 

Issuing stock means selling a part of your business. Depending on the percentage and terms, it may mean that someone else may be entitled to have a say in the way that your business is run. 

Understanding Profit

Increasing business profits can be beneficial for your company; however, it is always important to remember that any new source of profit (such as developing a new product or adding a new service) may also raise your expenses. 

Because this could push your costs beyond what is feasible (and result in an overall loss of profit), calculating business profit on new ventures is very important. Small business profits may be especially vulnerable to upfront costs for new lines of products or services. 

Plan Carefully

Small business cash flow considerations are particularly important because newer businesses may have less cash flow to draw on. 

Regardless of the size of your business, good planning involves careful and accurate bookkeeping. This is essential for both legal and financial purposes. Moreover, it can help you manage cash flow vs. profitability. 

With the advent of the Internet, online bookkeeping has become an advantageous way to track your business accounts. Accurate, up-to-date records will give you a snapshot of the health of your business, as well as your cash flow. 

Timely bookkeeping can also help you avoid the need for catch-up bookkeeping. However, if you do need to catch up, xendoo can certainly help. 

Putting It All Together

Though higher business profits are an understandable goal for any business, you must plan carefully to balance cash flow vs. profit. As noted in this article, it is possible for a business to be profitable, but still have poor cash flow. 

Conversely, a business can have robust cash flow but have little profitability. To properly manage both business cash flow and profits, you need accurate, timely bookkeeping.