Monitoring costs and expenses is a function that all business owners should do. Making money involves ensuring the cash in exceeds the cash out therefore the business owner needs to minimize costs as far as possible. In order to minimize costs, the business owner needs to check every item of expenditure and ensure the purchase was necessary. In addition it is important to ensure the best price was paid for the desired quality.

All business owners should be aware of every single expense, regardless of how big or small and they should be aware of the expense before the cash leaves the bank. It is no good being made aware after the event as nothing can be done about it, and if the expenditure was unnecessary it is simply too late and there has been cash spent on potentially unnecessary items.

So what is the best way of tracking and monitoring these expenses? Below are some tips that will help you know exactly what your business payments relate to so you can control your business;

Record all expenses in a pre ruled book or on a spreadsheet. The book or spread sheet should be divided into columns that include the date, the cheque number (or if paid by cash note that fact), supplier’s name, the gross cost, the VAT and the net cost. In addition to these basic columns there should be more columns in the book or on the spreadsheet that analyse out the expenditure further. Such headings may include things like purchases, postage and stationery, telephone, rent and rates, legal costs and any other expense. In order to fully monitor and control the costs the owner of the business should be aware of not only the amount of each expense but also what it relates to.

All receipts and invoices should be kept and filed away. Never throw anything out, regardless of what it is for. All records in the book or on the spread sheet should be given a unique number which is cross referenced to the relevant purchase invoice or receipt. This enables the owner to be able to tie up each payment to supporting documentation, which is of great importance for putting the accounts together or if there is a tax investigation.

Recording expenses for which there is documentation, such as invoices and receipts, is easy but what about those other expenses? The business may have direct debits and standing orders or direct payments that leave the bank, such as insurance payments, for which the documentation comes once a year. There is the potential these payments get overlooked but it is vital these costs are also recorded in the book or on the spreadsheet. In order to do this it is advisable the bank statements are reviewed and all items of expenditure are ticked back to the book or spread sheet. This will help to ensure all expenses are fully recorded.

At the end of each month a summary account should be written in the book or typed on the spreadsheet. This account doesn’t need to be detailed and should include the cash brought forward add the receipts less the expenses (that are detailed) to arrive at a closing figure. This closing figure should then be agreed to the bank statement by means of a bank reconciliation. This reconciliation will ensure the book or spreadsheet includes all items of expenditure and income.

Another way of controlling costs is to prepare a monthly list of all items of expenditure, from the book or spreadsheet, and thoroughly review it. If the amounts spent on, say postage and stationery, is higher than expected the business owner should investigate and find out why. If there are one off items then no further action is necessary, however if it turns out a specific type of ink cartridge (per say) is very expensive the owner can try and find an alternative supplier or item in order to get the costs reduced and increase the net cash in as a result. This review should be done on a regular basis to ensure that any problems are picked up as soon as possible and can be rectified in a timely manner before too much cash is wasted.

Some small business owners may think they have full control over the expenses and that they know exactly what is being spent, therefore recording the expenses is not necessary and just a waste of time. This line of thought can be very dangerous as it is almost impossible to remember exactly how much was spent and where it was spent and the business owner is likely to ‘forget’ many things, leading to a distorted picture. Recording all expenses is something that all business owner’s should do since the actual expenditure is usually far higher than what the owner thought it was and seeing it in black and white is often the catalyst that makes the owner sit back and think “is this really necessary? Can I get it cheaper elsewhere? Is there a better alternative?” before spending the money, which helps to decrease costs and make the business more profitable.