Managing business expenses effectively for financial clarity

Being responsible for your business finances means employing tactics and best practices that may not come naturally with your personal finances.

Money management in business involves a range of systems and careful consideration to ensure you can handle your financial expectations; make payments on time, and keep your business running effectively. Whether you are in charge of managing your entire expenses or only one aspect such as payroll, understanding these key principles could be the key to a bright financial future.

In this blog, our experts discuss the best practices that can help you manage business expenses successfully for Self Assessment.

Business expenses explained

Business expenses encompass a range of costs incurred by a business in the process of operating and generating income. This includes the expenses necessary for the day-to-day function of your business such as operating expenses, including salaries and rental payments, and capital expenses like the cost of machinery, tools, computers, or even the building you operate a business from.

Business expenses can be categorised in the following way for Self Assessment:

Operating Expenses:

• Rent: Payments for office or rental space.

• Salaries and Wages: Payments to employees

• Utilities: Bills for electricity, water, heating, internet.

• Office Supplies: Items like paper, pens, and other materials required for daily operations.

• Insurance: Premiums paid for business-related insurance policies.

• Marketing and Advertising: The costs associated with promoting the business, such as digital ads, print campaigns, or social media promotions.

• Travel and Meals: Expenses related to business travel, including transportation and accommodation.

Capital Expenses:

• Equipment: Purchases of machinery, computers, or vehicles that are expected to be used for extended periods of time.

• Property: Expenses related to buying or improving real estate for business use.

Business expenses are not just limited to the above, as each business will have their own specific expenses related to the type of business or service they offer. As a small business it is important to understand which aspects of your business will incur frequent costs, and how you plan to afford these costs or retrieve any money if it is owed to you.

Tracking these expenses is an important process to ensure your business runs properly. QuickBooks provides expert expense tracking software for small businesses, accountants, and sole traders. Using accounting software to digitally track expenses for sole traders and rental income will soon become a legal requirement with Making Tax Digital for Income Tax Self Assessment.

Business expenses vs. personal expenses

Although there are some similarities in the way you handle both personal and business expenses, it is important to remember that business expenses can be far more complex, and are often subject to mismanagement - a leading cause of small businesses going bust in the first few years.

Reports indicate that poor cash flow management is one of the primary reasons businesses fail, with some estimates suggesting it accounts for 82% of small business closures. Inadequate financial planning, such as overestimating revenue or underestimating expenses, can quickly deplete resources and leave businesses unable to meet their financial obligations.

This issue can be further compounded by the fact that businesses often handle much larger volumes of cash than an individual’s personal finances, and can lead to serious consequences if they are not handled properly, such as debt, business closure, or the forced sale of assets.

If you are in charge of your business expenses then you may be responsible for paying yourself, you can find more information on how to pay yourself as a business owner in our blog.

Characteristics of business expenses

These are costs directly related to running and operating a business. They are typically deductible from your business's taxable income, provided they are necessary and reasonable, and will usually include rent, wages, office supplies and equipment, travel expenses, advertising and more.

Characteristics of personal expenses

These are costs related to your personal lifestyle and not tied to generating income from a business. Personal expenses are not tax-deductible, generally consisting of rent or mortgage payments, groceries, personal travel, clothing (unless specific to work), and household bills.

The importance of effective expense management

You can drastically improve the growth and survival of your small business with effective expense management. Clear separation and management of expenses can not only keep your finances in order, but also protect your business from potential legal and financial pitfalls.

Reduce your Self Assessment tax bill

Properly categorising your business expenses can significantly lower your income tax burden. Allowable expenses, such as rent for office space, travel costs, and business supplies, can be deducted from your taxable income and reduce the amount of tax you owe. This could ensure you do not pay more tax than necessary and keep your finances organised.

Read our guide on self-employed business expenses.

Self Assessment tax returns are easier

Effective expense management can streamline your tax return process. If business and personal expenses are mixed then it may lead to confusion, errors, or missed deductions. Keeping accurate records and separating expenses can ensure your tax filings are compliant and cause less stress when it comes time to file tax returns.

Better cash flow management

By tracking your expenses you can monitor outgoing cash effectively. With a clear understanding of your business’ financial health you can make informed decisions about budgeting, investments, and areas where cost-cutting might be necessary. This can reduce the risk of running into cash flow issues, a leading cause of business failure.

How to track your business expenses effectively

Tracking your business expenses is more than just logging receipts, it requires a system that ensures compliance, maximises tax benefits, and provides insights into your spending patterns. Using the following methods in combination with expert tracking software can help you effectively manage business expenses and avoid potential pitfalls that may arise from mismanagement.

Monitor all expenses

It’s a good idea for your business to have a concise list of all outgoing expenses, including dates for expected payments, money you owe, payment plans and remaining balance on debts if necessary, and any other expenses that move money out of your business.

Keeping an updated list means you can stay on top of regular payments, be alerted if a payment has failed or is no longer required (such as when a service ends or debt is paid off), and figure out if you have money left in the budget to take on additional expenses.

Discover our helpful tutorial on cash flow management.

Define which expenses can be claimed on tax relief

If you are self-employed or run your own business then there are certain tax reliefs and business expenses you may be able to claim back, particularly costs related to the daily running and operations of your business. This includes:

• Business Rates Relief: Your local council may offer discounts for eligible properties through business rates relief.

• Travel Expenses: You can claim mileage, vehicle insurance, fuel, train fares, or taxi costs for business travel. However, you cannot claim for your daily commute to and from your regular place of work. If a trip is part business and part personal, only the business portion can be claimed.

• Internet and Phone Bills: If your internet or phone usage is partially for business, you can claim the business portion. To do this, you must clearly separate and provide evidence of business use, such as using a dedicated work phone or laptop.

• Goods for Resale or Raw Materials: Any materials, stock, or goods purchased specifically for resale or production are tax-deductible.

• Marketing Costs: Advertising, website hosting, and subscriptions to trade publications or memberships to professional bodies are all allowable expenses. However, costs related to entertaining clients or suppliers cannot be claimed.

• Business Premises Costs: If you work from a dedicated business premises, you can claim expenses such as rent, utilities, heating, lighting, security, and building insurance. However, the initial cost of purchasing or extending your premises is not claimable as an expense.

*It is important to consult with your accountant before considering any of the above options, as there may be certain restrictions that make claiming tax relief a more complex process, depending on the details of how your business runs. You can connect with a chartered accountant near you using our Find an Accountant service.

Create expense reports 

Accurate expense reports are crucial to understanding the financial health of your business, and will assist in keeping track of any outgoing money from your business.

Regularly reviewing your expense reports can also help you, or your accountant, to identify any money-saving opportunities, which may include ways to claim back certain expenses, unnecessary expenses, or a number of other methods that can only be implemented when you have a clear and up-to-date picture of your overall expenses.

QuickBooks’ easy-to-use software helps you create real-time accounting reports to make smart business decisions.

Utilise accounting software 

Proper use of accounting software can help your business track outgoing expenses, using data insights on cash flow to determine areas of focus for your finances. This may include identifying money-saving opportunities, automating your outgoing payments to reduce admin time, and matching receipts to payments for better clarity and compliance with HMRC and Making Tax Digital for Income Tax Self-assessment.

You can enhance the way you track and handle your business expenses with QuickBooks’ expenses accounting software, giving you valuable data insights that allow you to focus on growing your business.

Final thoughts

Understanding how to manage business expenses is a key aspect of growing and maintaining a financially healthy business. Using the tips provided in this article, you may be able to avoid some of the biggest pitfalls that affect many new and small businesses, often leading to closure and further expenses. 

Hiring an accountant is one of the best ways to stay on top of your business finances, and utilising their expertise means hiring them may prove to be one of the best investments your business could make.

The information on this website is provided free of charge and is intended to be helpful to a wide range of businesses. Because of its general nature the information cannot be taken as comprehensive and they do not constitute and should never be used as a substitute for legal, accounting, tax or professional advice. We cannot guarantee that the information applies to the individual circumstances of your business. Despite our best efforts it is possible that some information may be out of date. Any reliance you place on information found on this site or linked to on other websites will be at your own risk.