Tracking your business expenses may seem tedious, but it’s a key part of effective money management. Small business expense tracking doesn’t just give you a better idea of your business’s overall financial health, it also helps you prepare for tax season.
If you’re not sure where to start, here’s how to learn more about the importance of tracking your expenses—and how to do it right.
Why should you track your business expenses?
Understanding your business expenses is the first step to improving your profitability. When you know where your money is going each month, you can make more informed decisions about your spending and develop more effective growth strategies.
Small business expense tracking helps with the following areas:
- Cash flow: Monitoring your expenses helps you maintain healthy cash flow and create more accurate cash flow forecasts.
- Money leaks: When you regularly review your spending, you can more easily identify areas where you might be losing money.
- Revenue: You’ll be able to create stronger revenue forecasts, which can help you set more realistic sales goals.
- Taxes: Keeping a careful record of your expenses throughout the year makes it easier to maximize your tax deductions.
- ROI: Tracking your expenses—and measuring the outcomes of those costs—is a good way to determine your ROI for each cost.
- Budget: Tracking your expenses is key to creating and sticking to your business’s monthly, quarterly, and annual budgets.
Which business expenses should you track?
Business expenses refer to any costs related to running your business. That includes operating expenses like software and marketing, as well as expenses related to goods and production, such as materials or storage.
For tax deduction purposes, the IRS defines business expenses as costs that are “ordinary and necessary.” That means any business expense you want to deduct should be a normal and essential part of maintaining operations.
The expenses you track will vary slightly depending on your industry and business model, but in general it’s a good idea to keep tabs on the following:
- Rent
- Utilities
- Office IT
- Office equipment
- Insurance
- Professional services
- Materials
- Storage
- Labor
- Marketing and advertising
- Software hosting
- Service subscriptions
- Employee salaries and benefits
- Business travel
- Business vehicles and mileage
- Office meals
How to manage small business expense tracking
Tracking your business expenses doesn’t have to be complicated. All you need is a good system. Before you choose one, though, set yourself up for success by taking the following steps:
Separate your business banking from your personal banking.
If you haven’t already separated your personal and business financial accounts, now is the time to do it. Having a designated business bank account and business credit card makes it easier to categorize and account for your various business costs.
Learn how to digitize your receipts.
To save time and stress come tax season, it’s smart to get into the habit of digitizing and organizing all your business receipts. As you pay for business expenses—whether it’s gas for your delivery vehicle or updated inventory management software—take a few minutes to save and file your receipts.
For paper receipts, try using a receipt scanning app to upload a digital copy to the cloud. For receipts that come via email, you can either screenshot the receipt or save a PDF copy of it. From there, make sure to label your receipts and file them in easy-to-find folders on a cloud-based drive.
Create categories for your expenses.
Learning how to categorize expenses for small business costs is crucial. When you organize your expenses into categories, it’s easier to see patterns in your spending, identify unnecessary costs, and figure out how to adjust your cash flow.
Start by making a list of your various fixed and variable business expenses, then jot down a note or two to describe each one. As you go down the list, you’ll start to see natural categories emerge. Here are just a few examples:
- Office: electricity bills, water bills, telephone costs, office supplies, and office equipment
- Marketing and advertising: software subscriptions, direct mailers, website hosting
- Cost of goods sold: materials, inventory storage, packaging, labor
3 ways to track your business expenses
There are a few methods you can use to categorize and record your business expenses:
1. Create and update a spreadsheet
If you’re well versed in Excel or if you don’t have a lot of business expenses, you may want to use a spreadsheet to record your spending. You can either create your own tracking sheet or use one of Excel’s small business expense tracking templates. You may want to include columns that specify the following: type of business expense, amount paid, vendor or company paid, date, purpose for the cost, and any relevant notes or details.
Keep in mind that while tracking expenses via spreadsheet is an affordable, accessible option, it’s not necessarily the most secure or accurate method. It’s easy to make errors when manually inputting information; plus, if your spreadsheet doesn’t automatically update to the cloud, you risk losing vital business information if your computer crashes.
2. Hire an accountant
If you want to take a more hands-off approach to expense tracking, consider hiring a business accountant as a full-time staff member or on-call consultant. You’d still have to supply your accountant with information, invoices, and copies of your receipts, but the person you hire could take over the daily categorization and tracking, then generate monthly or quarterly reports for you to review.
3. Invest in expense tracking or accounting software
Using accounting software, budgeting apps, or tracking systems is one of the simplest ways to ensure accurate expense tracking. Most software platforms integrate with your business bank account and automatically categorize and update your expenses, so you don’t have to spend time inputting information.
Not only that, but many budget planners and accounting systems also generate a weekly, monthly, or quarterly expense report, so you can see real-time data about your spending whenever you want.
To decide which software system will work best for your business, think about your budget, expense tracking needs, and short and long-term business goals. There are countless expense tracking options out there, but here are some of the best for small businesses:
- QuickBooks: QuickBooks is an all-in-one business accounting platform that handles payroll, expense tracking, and online payments. You can connect all your bank and payment accounts to the platform, scan business receipts directly into the app, and see your expenses organized all in one place.
- Mint: Mint is a good option for freelancers or sole proprietors who want a simple, straightforward way to track their expenses. You can set your budget within the app, create categories for your expenses, and monitor your spending on the dashboard.
- FreshBooks: FreshBooks connects to your bank account or credit card to automatically sort and update your expenses. The platform also lets you take pictures of your receipts and mark certain expenses as billable for easier invoicing.
- Expensify: Expensify is a tracking app that’s especially well-suited for business travel. You can scan your receipts, track mileage, and connect to your accounting system or business credit card.
Review your expenses monthly
Even if you use an expense tracking app or accounting software, it’s still important to review your expenses every month for errors and insights. Taking a closer look at your expenses is a great way to understand your cash flow, make more accurate sales forecasts, and stay within your budget.
Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
