When you track business expenses, you know whether you’re experiencing profits consistently or spending more than you should. If you’re your own bookkeeper, you need to know how to track your expenses. Even if you have an accountant, it’s strategically valuable to be aware of what’s happening in the books.
Here’s what you need to know about business expense tracking, including why it matters and how you can do it efficiently.
Business expense tracking basics
Sometimes, the hardest part about running a business is ensuring you have more money coming in than going out.
Expense tracking is critical to measuring your business’s success. Complete financial transparency and knowing where your money is going, and why it’s going, directly translates into understanding your business’s financial health.
You know your business expenses: they’re what you spend money on to keep your business running smoothly. Whether it’s rent, utilities, salaries, or one-time expenses like upgrades or new equipment, you need a way to keep track of all of your financial data and turn it into valuable insights.
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The importance of tracking business expenses
That’s where expense tracking comes in. It’s the process you use to keep a daily record of everything you and your employees spend money on through tracking and reporting receipts, invoices, reimbursements, and credit card statements.
If you’re a business owner, you need to know how to track your business expenses so that your numbers are accurate.
If you have an accounting expert by your side, then you might already be familiar with the process. But it’s still a good idea to find out how to use expense tracking so you can improve your business and financial management skills.
So here’s why keeping track of business expenses is so important:
1. Business expense tracking helps you create a budget
There are many different business budgeting methods out there, and you can choose the best one for your business by identifying your habits via expense tracking.
Tracking the amount of money you are bringing in versus how much you’re spending paints a clear picture of your profits and losses, which will influence the type of budgeting method you choose.
2. Business expense tracking identifies your tax deductions
Businesses of all shapes and sizes can save a lot of money with tax deductions. Come tax time, you’ll need to categorize all of your expenses so you can get the maximum deduction. Since not all business expenses are deductible, your expense tracking and reports can help you organize these details ahead of tax preparation.
3. Business expense tracking can optimize your cash flow
Cash flow can make or break a business. Cash flow measures the movement of your funds in your business. A positive cash flow tells you that you have more money coming in than going out (a profit), while a negative cash flow is when you’re spending more than you’re making (a loss).
Expense tracking can help you identify issues and potential cost savings so you can remedy things before any real problems occur.
How to keep track of business expenses in five steps
Use these steps and tips when tracking and managing business expenses:
1. Use a business bank account and dedicated card
The last thing you want to do as a business owner is mix up your business and personal transactions.
This may not seem like a bad idea, since your personal finances depend on how your business is doing. However, it can make long-term money management confusing.
Separate business bank accounts simplify expense management because you can distinguish between business and personal deductions when it’s time to file taxes. Plus, having a separate account will save you hours of research if you ever get audited.
Additionally, you’ll want a dedicated company credit card. Using a business card is pragmatic. With it, you can:
- Make big purchases when you’re just starting out to help get you on the right track.
- Establish a healthy credit history and score for your business, which increases your odds of receiving loans and higher lines of credit.
- Earn bonuses and rewards for meeting spending quotas (depending on the type of card you choose).
Not only do you get perks, separating your business and personal assets greatly increases the ease of managing your financial accounts, expense tracking, and tax preparation.
2. Choose between the cash and accrual accounting methods
Businesses need to choose an accounting method for clear rules when reporting income and expenses. Small businesses with $25 million or less in gross receipts for the three previous tax years can use accrual or cash accounting methods in their financial reports. You can also opt for accrual if you’re a company that holds physical inventory or the business is a corporation.
This cash method records the transaction when the payment is received. Then, expenses are deducted from the tax year that they’re paid. This straightforward process is highly recommended for small businesses just starting out since everything is recorded as it happens.
The accrual method records the transaction on the books when the sale occurs or service is provided. Then, business expenses are deducted in the tax year they incurred it, regardless of when the payment was made. This process requires double-entry bookkeeping, which is right for seasoned business owners.
Ultimately, the cash method is easier to understand, but the accrual method does provide a better economic view of your business’s financial health. Either way, your expense management strategy hinges on this decision.
3. Digitize your receipts with a receipt scanner
Time is money, and investing in a receipt scanner will save you hours of manual data entry.
Software designed to read the essential aspects of scanned receipts, such as the receipt’s time, date, location, and total expense, can automate the organization of these essential records and improve the reimbursements process for employees.
There’s no need to categorize your paper receipts or worry about losing them over time with a scanner. You can save every single receipt for years. When you need to, you can easily search and organize all of your expenses with the click of just a few buttons.
4. Use flexible accounting software to track expenses
The easiest way to categorize and keep all of your expenses in one place is through cloud-based accounting software.
A cloud platform allows users to access the software via the internet, meaning that you and your employees can use it anywhere.
Cloud-based expense tracking software is an excellent investment because it automates key management functions. So you can easily track, manage, analyze, and review expenses as they come in since they connect to your bank accounts and update automatically.
Accounting systems like these also have expense reporting tools that help you understand your business’s financial health based on current and past trends.
5. Review your business expenses regularly
Even with the ease of accounting software and other helpful tools, you need to stay on top of reviewing and categorizing your expenses regularly. This means staying on top of expense reporting activities like timely transactions approval as they’re charged or as employees submit them.
Dedicating time to reviewing individual transactions and trends across expense categories provides valuable insights on how the business’s spend is trending, and where it may need to cut costs to maintain overall business health.
Of course, you always have the option to automate these and other tedious aspects of your business expense management like reconciling credit statements using expense management software.
Real-time expense tracking and management with automation
Staying on top of your business expenses provides essential details about your cash flow and planning. The investment is important, but the time investment can be costly if you don’t have scalable systems.
Filling out expense reports, receipt scanning, reconciling accounts, expense categorization, all of these tasks take time and are a drag on employees across teams and departments.
To reap all the rewards without the extra costs, consider a swap to a dedicated expense management platform, like BILL. Not only does our platform streamline expense tracking, it comes with additional controls that help you keep business expenses in check.
Every step of the expense management process is expedited with automated account reconciliation and expense reports. And with integrations with the most popular accounting software, everything will be kept in sync for accuracy across platforms.
Plus, our virtual cards and corporate credit cards come with custom rules and cost controls so transactions are only approved if they’re for set vendors and amounts. Now you can stay within budget without micromanaging every expense.
Master managing expenses with BILL. Reach out to schedule a demo and see our platform in action.
Expense tracking FAQ
What is expense tracking software?
Expense tracking software are dedicated business expense tracker apps that expedite the tasks and workflows pertaining to expense tracking. Some potential features include:
- Receipt scanners that scrape information from receipts and turn them into transactions
- Reimbursement reports for expenses incurred by employees
- Budgeting and forecasting reports
- Bank integrations to automatically import transactions
- Approval workflows
- Automated expense categorization
As businesses start to scale, it’s best for them to move away from manual expense tracking which is time consuming and prone to errors. Switching to dedicated software gives you an expense management solution that can grow with your operations and keeps workflows efficient.
What are expense categories?
Expense categories are buckets that transactions are classified as based on what was purchased.
Typically, expense categories are used to track tax deductible expenses and spend levels. However, some businesses will use customized expense categories in their reporting to provide the insights they need.
Some common expense categories include:
- Salaries and wages
- Office supplies
- Rent or lease expenses
- Insurance premiums
- Marketing and advertising
Is expense management different from expense tracking?
Expense management speaks to a broader range of practices including planning, forecasting, and budgeting. It follows the entire process of a dollar being spent, from planning for and approving the expense to recording transactions and analyzing the data.
Expense tracking is a subset of expense management. This is how businesses document transactions and the practice of looking back on them.
You can’t have expense management without expense tracking. But for smaller businesses with low transaction volume, they may use expense tracking without embracing all aspects of expense management.
What are expense reports?
Expense reports (or reimbursement reports) are a record of expenses incurred by an employee that are submitted for reimbursement. They go through an approval process before the business accepts the expense, records them on their books, and pays out the employee.
These reports are often supplemented with supporting documents like receipts or invoices which are used to verify the transaction. Without them, the business may not be able to claim the expenses as tax deductible or would be vulnerable in the case of an audit.
