Last week we covered how to deal with your corporation tax. One of the things I mentioned is that as part of your system to deal with CT, you need to track expenses correctly.
There are a million different systems to track expenses, ranging from "stuff all the receipts in an envelope and get a bookkeeper to track them" to using accounting software and tracking everything yourself. It doesn't really matter which system you use so long as you're comfortable with it and you know that it works and how it works.
At the end of the day, as the business's founder, you are personally, legally responsible for your company's record-keeping. If you screw it up, you can't turn around and blame someone else. You're the Director, it's your fault, and "not knowing" is not considered an excuse. If the bookkeeper screws up, it's still your fault.
Keeping track of expenses is really not hard at all, so if you do screw it up in a big way, it is really through your own sloppiness. Read this article, and this hopefully won't happen.
Many books about accounting (and many accountants) end up recommending a horrendous, antiquated system like SAGE or QuickBooks. This is often because they're written by accountants who are familiar with those systems and would rather everyone used them so they don't have to learn new systems. That's fine for the accountants, but from personal experience, most of those legacy accounting systems make me prefer to stick a sharp pencil in my eye rather than launch the horrible software.
What I'm going to recommend should work until you get to the stage of having a few (up to 10 or 20) people on (profitable) payroll - a small, profitable company. If you're VC-funded and you've hired 50 people, you probably won't be allowed to do this, but for most people bootstrapping their own business, or who have taken a small amount of seed capital, this system will work and will be relatively little effort.
My expense tracking system is based on a web-based product called FreeAgent (referral id included). It's slick, it's modern, it can track transactions and receipt scans together, and it's cheap (if £30/m breaks your bank, you have other issues). I don't normally recommend that people take on fixed, recurring expenses early on in their business's life, but this is one that is worth spending money on right away so your accounting is entirely sorted out from day one.
However, a tool is not a solution all by itself. "Buying FreeAgent" is no more a solution to your expense tracking than "Buying FogBugz" is a solution to your bugs. People, processes and tools, in that order, as I've said before.
So let's look at those three aspects of a possible expense-tracking system using FreeAgent.
What people do you need involved in solving this?
Well, when you're by yourself, it's just you. And yet, even then, you might find it helpful to get a virtual secretary to spend an hour a week doing the manual, boring part of the work (linking receipts to transactions), so that it happens even when you're distracted or simply can't be bothered. We (GrantTree) pay £30/hr (inc. VAT) to a freelance personal assistant to spend one hour a week doing this (I'm happy to recommend her if you email me). Even (or perhaps especially) if you're by yourself, you may wish to hire such a person to get rid of the drudgery. However, I recommend doing it yourself for at least a month or two so you fully understand what's involved.
However, even with a PA doing the reconciliation work, the rest of your team (that includes you) needs to be committed to the idea that expense tracking is not optional. If you don't scan your receipts in time, there's nothing your PA will be able to do for you.
So, the "people" side of this process includes anyone who's capable of paying for things out of the company account, or of charging expenses to the company. They need to understand that having messy accounts is not acceptable, and so they need to be diligent about scanning invoices and receipts correctly and on time so that they can be reconciled with banking transactions without too much fuss.
This is the way GrantTree's expense-tracking process happens, which you can use as a model for your own expense-tracking.
First of all, all business expenses are, ideally, made on the company card. This ensures that they're not missed in the reconciliation. Of course, you should only give a company card to people who can be trusted not to misuse it - but even if they do charge inappropriate expenses in, you can always deduct those from later payments. FreeAgent supports tracking this type of mishap.
The second step is that any payment should result in a receipt scan in a pre-agreed "new receipts" directory. This is actually very easy to do without fuss, by using an iPhone app called MobileAgent, which costs a whopping £2.99. Go on, treat yourself. What MobileAgent allows you to do is to point to a DropBox folder and scan receipts directly into there, on the move. This means you don't need to keep paper receipts. Hurrah! So, every person with access to the company bank account should be scanning receipts into there as soon as possible after making the expense. MobileAgent will include the date in the file name, so that it's easy to reconcile later.
Thirdly, on a regular basis (e.g. once a week) you should import expenses from your online bank account interface into FreeAgent. So long as your bank support export in QIF format (which pretty much all of them do), you'll be able to do that.
This import needs to happen before the reconciliation (done by yourself, your virtual PA, or someone else), which is the fourth and final step. Once a week, your PA should go through all the unexplained transactions in FreeAgent, and match them with receipts in the common folder. Unless you've got a lot of transactions, this should not take more than one hour a week.
As part of this final step, any transactions that can't be explained, and any receipts that can't be matched, should be highlighted to the people with access to the business card. Since we're still only a week away from the oldest unexplained transaction, it should be easy to figure out what happened. What you don't want is a situation where an expense from 3 months ago is unexplainable. That sucks, and ends up causing you worry, especially when you need to file a VAT return.
Does this process need to be weekly? Not necessarily, but the more regular it is, the less problems you will have. I recommend weekly, but it's up to you.
If you just implement those 4 steps, your expenses will be tracked properly so that you are well prepared to file correct accounts. There are other things to think about too, like capitalisation, categorisation, and other such concepts, but those are things to know rather than things to do. The process above can remain the same for quite a long time into the life of your business.
We've already covered this, but basically the tools to support this process are:
- an online accounting tool (FreeAgent, Xero or KashFlow - any of them should do);
- a mobile app that can scan receipts as they happen, either directly into your accounting system or into DropBox; all three of the solutions mentioned above have iPhone apps.
Part of the process of reconciling expenses is to categorise them. That's a whole topic in itself, and I'll write about that next week. Capitalisation is also an important concept for larger equipment expenses.
The process we've outlined will put you in a good position to ensure that you always file your VAT returns correctly and without fuss. VAT is a whole topic in itself, so it will also be covered in a later article.
If you make expenses by cash or on a card that doesn't belong to the company, you can still enter those. Every person who can make such expenses should have an account in FreeAgent, and they can then create the expense manually in the system, or with MobileAgent. FreeAgent will automatically track who is owed how much for expenses, and how much of those expenses has been paid back to the user, which is a really nice time-saving feature. These types of expenses should be done just as promptly as normal expenses, by the way, for the same reasons.
The key take-away from this article should not be that you need to follow my system to the letter (or even at all). This is just an example of a system that works. Tailor it to your own business, adapt and evolve it as you gain your own experience and opinions on the topic. The key objectives of the system are that every invoice or receipt is explained promptly and correctly, and with a minimal amount of time wasted running around trying to remember what happened 3 months ago. Whatever works for you to achieve that is probably the right system for you.
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