You may use a variety of methods to track business expenses, but in order to manage your business adequately, keep track of expenditures, and ensure that expenses are accurately accounted for, you will need to create an expense tracking system that works for you.
Tracking business expenses is a crucial part of running a successful company. Understanding where your money is going allows you to make informed decisions, prepare accurate financial statements, and maximize tax deductions. However, with so many expenses across various categories, tracking everything can quickly become complicated and time-consuming.
In this comprehensive guide we will walk through the fundamentals of tracking business expenses provide tips to streamline the process, and explain why diligent expense tracking is essential for every business. Whether you are just starting out or looking to improve your existing system, read on to learn how to track expenses like a pro.
Why Track Business Expenses?
Here are some of the key reasons to make expense tracking a priority:
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Tax Deductions Expenses directly related to running your business are tax deductible Careful tracking provides documentation to reduce your taxable income.
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Identify Cost Trends: Analyzing expense patterns over time helps you identify areas of heavy spending. You can use these insights to reduce costs and optimize budgets.
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Accurate Financial Statements: Detailed expense records lead to more precise income statements, balance sheets, and cash flow projections.
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Improve Decision Making Understanding exactly where money is being spent allows you to make smart resource allocation choices
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Monitor Business Health: Sudden changes or anomalies in expenses can flag issues needing attention before they become major problems.
What Counts as a Business Expense?
Broadly speaking, a business expense is any cost incurred in the normal course of running your company. Here are some common examples:
- Office supplies and equipment
- Software, subscriptions, and services
- Professional and legal fees
- Advertising and marketing
- Employee salaries, benefits, and payroll taxes
- Travel, meals, and entertainment for business purposes
- Interest paid on business loans and credit cards
- Rent, utilities, phone, and internet
- Vehicle costs, parking, and tolls
- Insurance premiums
- Training and education expenses
However, personal expenses are not deductible, even if you own the business. Make sure to only track legitimate business-related costs.
Manual Tracking vs. Accounting Software
There are two main methods for tracking business expenses: manual and software-based.
Manual Tracking
- Collect and organize receipts either on paper or digitally
- Record transactions in a spreadsheet or notebook
- Categorize expenses
- Add up totals periodically
Pros: Simple, flexible, works for very small businesses
Cons: Time-consuming, higher risk of errors, lack of reporting and analytics
Accounting Software
- Expenses directly imported from bank & credit card
- Automatic categorization
- Built-in reporting and analytics
- Tax ready documentation
Pros: Automated, accurate, detailed analytics & reporting
Cons: Monthly subscription cost, learning curve
For most businesses, a dedicated accounting software will save time and provide valuable insights. Popular options include QuickBooks Online, Xero, Sage, FreshBooks, and Wave.
5 Steps to Track Business Expenses
Follow these best practices to implement a streamlined expense tracking process:
1. Clearly Define Business vs. Personal
- Set policies on what counts as a business cost in your company to avoid issues later. Some grey areas include travel, entertainment, and auto expenses.
2. Collect and Organize Receipts
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Keep complete paper or digital copies of every receipt. Dropbox, Google Drive or Evernote make great digital filing systems.
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Date stamp receipts and include details like attendee names for entertainment and mileage for auto expenses.
3. Record Expenses in Accounting Software
- Enter transactions frequently, don’t let expenses pile up.
- Take advantage of automation through linked bank accounts and corporate credit cards.
- Assign expense categories consistently.
- Add detailed descriptions for clarification.
4. Perform Regular Review
- Spot check transactions for accuracy.
- Identify irregular spending patterns or outliers.
- Make any required adjustments.
5. Reconcile with Bank Statements
- Match expenses in accounting system with bank and credit card statements.
- Research and resolve any discrepancies.
Expense Tracking Tips and Tricks
Follow these tips to maximize the value of your expense tracking:
- Use a business credit card – Simplifies tracking, improves cash flow, earns rewards
- Automate what you can – Bank feeds, recurring transactions, and mobile receipts
- Review weekly – Prevents expense backlog and improves accuracy
- Be detailed – Comprehensive descriptions help clarify business purpose
- Standardize categories – Enables reporting by type of expense
- Scan receipts – Electronically filed receipts are easier to find later
- Track mileage – Use a logbook or app to capture business drives
- Travel wisely – Know deductible limits for meals, gifts, and entertainment
- Watch for cash – Easy to miss cash payments without diligent tracking
Why Expense Tracking Matters
As you can see, carefully monitoring your business expenses provides tremendous financial visibility and control. It enables smarter decisions grounded in real data. Just as importantly, detailed records are required by the IRS to justify your tax deductions.
Investing the time to establish robust expense tracking habits will provide clarity into your cash flow, invaluable business insights, and maximize your tax deductions every year. The effort required up front is well worth the long-term payoff.
- Leverage accounting software to automate where possible
- Create clear expense policies
- Collect and organize receipts
- Log transactions frequently and in detail
- Perform regular review for accuracy
- Reconcile with bank statements
- Analyze for actionable patterns and outliers
Consistent, detailed expense tracking sets the foundation for business success. Take the time to implement a thorough system and make it a core financial process. Your business growth and bottom line will thank you.
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Our Small Business Expert
You may use a variety of methods to track business expenses, but in order to manage your business adequately, keep track of expenditures, and ensure that expenses are accurately accounted for, you will need to create an expense tracking system that works for you.
- Open a business bank account
- Choose an appropriate accounting system
- Choose cash or accrual accounting
- Connect financial institutions
- Begin managing receipts properly
- Record all expenses promptly
- Consider using an expense app
Step 1: Open a business bank account
As a new business owner, you will need to open a business bank account. Once that account is operational, it should be used exclusively for business transactions.
While there may be an instance when you use your personal bank account for business purposes, having a separate business account will make it much easier to track and record your expenses properly.
Tips and Tools for Tracking Deductible Business Expenses for Taxes (and beyond!)
How do I choose a business expense tracker?
Consider business expense trackers that are made specifically for your most common type of spending. For example, if your employees drive a lot for work, narrow your choices down to software products that primarily track mileage. Additionally, make sure the tracker integrates with your accounting software to minimize manual data entry.
How do I keep track of my business expenses?
As you can see, you have many ways to keep track of your business expenses, both manually, and by using accounting software. While using accounting software is always best for any type of business tracking, including both income and expenses, there are times when it is a must.
How do I track my expenses?
Log your expenses manually, or by linking a business card to your accounting software. Here’s the tricky part — if you’re relying on automated business tracking, you have to make sure every expense still gets tracked.
Should you track business expenses?
Tracking business expenses isn’t just a way to keep you organized. It helps you look at the big picture so you can make more educated financial decisions for your business. To get to that point, you’ve got to start somewhere—and as you’ll soon find out, that’s at the bank. Keep scrolling to learn how to track business expenses.
