When managing a business, you want to keep an account of all the money moving through it. Expense tracking may not be the most exciting part of running a business, but it is essential to ensure your company stays financially healthy.
This post will teach you how to manage your expenses to keep your small business profitable and your cash flow healthy. You will learn all about business expenses, including the benefits of tracking, common categories, and tips to keep your expenses organized.
Key Points and Facts About Business Expense Tracking
- Business expenses are the costs of operating your business, and they get subtracted from revenue to determine profit.
- Tracking expenses helps you manage cash flow, spot areas to cut costs, and prepare for tax season.
- To be tax-deductible, an expense must be both ordinary (common in your industry) and necessary (helpful and appropriate for your business).
- Most small businesses can use cash basis accounting; businesses with average annual gross receipts above $32 million generally must use accrual accounting.
- Common expense categories include payroll, rent and utilities, insurance, travel, and software.
How to Track Your Small Business Expenses Using These Tips
Tracking business expenses enables you to reduce costs in areas where you could be overspending while keeping a positive cash flow. It also saves you time and headaches when filing returns and claiming deductions during tax season.
Action Steps for Tracking Business Expenses
1. Open a business account at the bank
- Separate your business funds from your personal money.
- Open checking, savings, credit card, and merchant services accounts for the business.
- Get an Employer Identification Number (EIN) from the bank, or use your Social Security number if you are a sole proprietor.
2. Perform all business transactions with the company credit card
- Use a dedicated business credit card to build a financial history that can help with future financing.
- Rely on credit for big purchases when you are starting out.
- Look for a card that offers travel or business rewards.
3. Decide on cash or accrual accounting rules
- Pick one accounting method — cash or accrual — and stick with it.
- Cash basis accounting is the simpler of the two, and it is the method most small businesses can use.
- Under current IRS rules, businesses with average annual gross receipts up to $32 million can generally use the cash method; larger or inventory-heavy businesses typically need accrual accounting.
4. Automate record keeping and expense tracking with accounting software
- Put everything in one spot with a cloud-based accounting tool.
- Use software to categorize spending and run year-over-year comparisons.
- Try Microsoft Excel when starting out, then move to QuickBooks or Xero as your needs grow.
5. Sync your bank account and accounting software to import transactions
- Connect your bank account to your accounting software to import transactions and statements automatically.
- Set the matching rules yourself to make reconciliation faster.
- Automatic imports can improve accuracy compared to manual entry.
6. Review expenses regularly
- Make reviewing and categorizing expenses a regular habit.
- Regular reviews give you a clearer picture of where your money goes.
- Poor cash flow management is a major factor in small business failure — one widely cited U.S. Bank study found it played a role in about 82% of the failures studied — so staying on top of expenses matters for the business’s survival.
The Benefits of Tracking Business Expenses
Tracking and organizing your expenses as they occur is one of the best things you can do to make your business financially easy to manage. Let’s look at the benefits of tracking business expenses.
Cash Flow Management
Proper expense tracking enables you to manage cash flow more effectively. It gives you insight into how much money is going out of your business, which lets you forecast cash flow problems. You can compare your expenses to your available funds to assess whether you have enough money to cover your costs.
Identifies Areas to Reduce Costs
Expense tracking allows you to identify where you are spending money and how much. You can then see whether you are within your monthly or quarterly budget. You’ll be in a better position to spot and cut unnecessary costs that may be eating into your profits.
Taking Advantage of Tax Deductions
For an expense to be tax-deductible, the IRS requires it to be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business, even if it isn’t indispensable.
The IRS can allow a partial or full deduction if an expense is ordinary and necessary, and if you can show evidence that it happened. This is why you need to keep your expense statements and receipts. Without tracked expenses, you can’t claim deductions, since you won’t have the figures or the proof.
Prepares You for Tax Season
Tax season is often stressful for business owners and freelancers, especially those who are unprepared. Keep your earnings and expense records in order well before tax time. This way, you won’t have to hunt for every receipt and invoice from the year, and you won’t need to hire a bookkeeper just to reconstruct your records. Tracking expenses on time lets you file returns and claim deductions without much hassle.
Enables Profit Margin Calculation
Profit equals revenue minus expenses. Profit margin is revenue minus total costs, divided by total revenue. Both formulas depend on knowing your expenses, so you can’t calculate your net income or margin without tracking them accurately.
Creating Budgets
To create a monthly or quarterly budget, you need to know where your money goes and how much you spend. Without that information, your budget has no foundation — it becomes guesswork, either too tight to cover your costs or too loose to match your actual spending. Tracking your expenses regularly removes most of that guesswork, since you’ll already know the figures a budget depends on.
Common Categories of Business Expenses
Business expenses are the costs incurred when operating a business, and they fall into several categories. This section gives a quick overview.
Payroll
Payroll includes all the wages, commissions, and bonuses paid to employees, whether full-time, part-time, or contractors.
Rent and Other Utilities
Rent is the cost of leasing business space, whether an office or a warehouse. Utilities cover services like electricity, water, trash collection, cell phone, and air conditioning.
Maintenance and Repair
These are expenses incurred to keep machines and equipment in working order.
Employee Benefit Programs
This category covers programs such as workers’ compensation insurance, health insurance, and retirement plans.
Travel
These are expenses for business-related travel, including hotel accommodation, meals, and flights.
Marketing and Advertising
This covers expenses for promoting your brand, products, or services, such as paid social ads, newspaper advertising, brochures, and posters.
Professional Services
These are fees paid for services such as legal, auditing, and accounting help.
Insurance
This category covers insurance premiums, such as vehicle, property, fire, theft, and liability insurance.
Taxes
Taxes are amounts a business owes the government on its profits.
Licenses and Permits
This includes the cost of acquiring and renewing licenses or permits, such as building permits and sales tax permits.
Software and Website Expenses
This covers software subscriptions, software development, web hosting, website maintenance, and domain registration.
Depreciation
Depreciation is the decline in value of a fixed asset over time due to obsolescence or wear and tear.
Should You Do Your Own Accounting or Use a Professional?
Base this decision on your level of expertise and the time you have available. Preparing financial statements and doing your taxes takes time, patience, and accounting skill.
If you are not trained in accounting or don’t have the time, it’s better to work with a professional. Certified accountants know the tax laws, and they can help you get the most out of your tax deductions.
You can also track and organize your expenses using the same software your accountant uses. Your accountant can set up your system for you and tell you which accounts to use for expenses. From there, you track your expenses and send your accountant a file, and they can optimize your deductions and file your taxes. This approach lets you keep an eye on expenses while still getting an accountant’s expertise, at a lower cost.
Tips for Organizing Your Expenses
The key to managing expenses easily and efficiently is investing in the right tools and systems. Check out these tips for tracking and organizing your expenses.
Use a Receipt Scanner to Digitize Payments
A small receipt scanner is a valuable investment for expense and document management. Most connect easily with accounting systems and map receipt details to defined fields, saving time and effort. You can also use your smartphone camera as a scanner.
Organize Your Expenses Daily
Make a habit of recording expense transactions daily, or right at the point of purchase. Doing so helps you remember more detail about each transaction. You’ll also be less likely to make errors or lose track of why an expense happened.
Checklist for Tracking Business Expenses
- Set up separate business accounts
- Business checking, savings, and credit card accounts
- EIN or Social Security number on file with the bank
- Choose your accounting method
- Cash basis for most small businesses
- Accrual if required based on gross receipts or inventory
- Pick accounting software
- Spreadsheet or entry-level tool to start
- Full accounting software as you grow
- Connect your bank account
- Automatic transaction imports
- Custom matching rules for reconciliation
- Review expenses on a set schedule
- Weekly or monthly check-ins
- Categorize and compare against budget
- Store receipts and records
- Digital scans or a receipt-scanning app
- Organized by category and date
Frequently Asked Questions (FAQs)
FAQ: Business Expense Tracking
What are business expenses?
- Business expenses are the costs incurred when operating a business. They get subtracted from revenue to determine net profit or income.
Why should I track expenses?
- Tracking expenses as they occur helps you manage cash flow, prepares you for tax season, and lets you claim deductions. It also comes in handy for budgeting and calculating profit margins.
What types of business expenses are tax-deductible?
- The IRS considers an expense tax-deductible if it’s ordinary, necessary, and helps the business generate income. Examples include travel, advertising and marketing, maintenance and repair, production costs, and payroll.
What types of expenses are not tax-deductible?
- A non-deductible expense is generally one that isn’t necessary for business operations and doesn’t help the business generate income. Examples include fines, penalties, and customer gifts.
Conclusion
Whether you are just starting your small business or already have an established one, you need to track your business expenses. Proper expense tracking puts you in a better position to manage cash flow and determine your profit margin. It also makes tax season easier, since you won’t have to search for receipts at the last minute.
There are many categories of business expenses. The most common include payroll, maintenance, repair, travel, insurance, rent, and utilities. To organize your expenses, use accounting software and store your receipts, either on paper or digitally. You can also connect your accounting software to your bank to import expense transactions automatically. And keep your personal bank account separate from your business one.
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