Small business expense tracking helps business owners keep track of their spending and manage their finances effectively. Business expenses are the money a company spends to keep up its day-to-day operations. These expenses include rent for office space, employee payroll, supplies, inventory, marketing expenses, and other necessary costs to keep the business running smoothly. Understanding how to track business expenses diligently makes it easy to identify areas to cut costs and how to manage cash flow for your business.
Benefits of Business Expense Tracking
Effective business expense tracking empowers small business owners to make informed financial decisions, maximize profits, and set a for future growth in the business. Here are some specific benefits of proper business expense tracking:
- Financial Awareness: By keeping a close eye on your business expenses, you can gain a clear understanding of where the money is going so you can make informed decisions about future spending. Staying aware of your expenses can also allow you to identify areas where you can save or minimize costs.
- Budgeting & Planning: Accurately tracking your business expenses allows you to create budgets for your business. Budgeting helps you set realistic goals, allocate funds appropriately, and ensure you have enough resources for the essentials.
- Tax Deductions: Tracking business expenses helps a lot when it comes to tax season. Properly tracking your expenses allows you to easily identify deductibles that can help reduce your taxable income, potentially saving you money.
- Business Growth: By tracking your expenses, you can identify areas where you can reduce spending to allow you to invest in growth initiatives such as expanding your business.
- Compliance & Auditing: Proper tracking ensures you comply with financial regulations and maintain accurate records. It helps reduce potential errors and helps you avoid legal or financial complications.
Tax Deductible Business Expenses
Tax deductible expenses can be subtracted from the business’s taxable income, potentially reducing the amount of tax owed. Depending on your business’s industry, special rules may apply to your business and what you can consider a tax deductible. Some common tax-deductible business expenses include:
- Insurance premiums
- Office supplies
- Employee salaries
- Benefits like health insurance
- Travel expenses
- Marketing/advertising expenses
- Professional services like lawyers, consultants, etc.
- Depreciation & amortization
Tax laws can vary by jurisdiction. Consult with a tax professional or accountant to ensure accurate reporting of tax-deductible expenses based on the specific regulations applicable to your business.
Creating an Effective Business Expense Tracking System
Setting up an effective business expense tracking system is crucial for understanding and maintaining your financial health. Here are some steps we recommend you add to your expense tracking process:
- Separate Business & Personal Expenses: Maintaining separate bank accounts and credit cards for your business helps you easily distinguish and track business expenses.
- Choose a Tracking Method: Different tracking methods include manual tracking on spreadsheets or software created for expense tracking. Consider cloud-based solutions or automation tools that can integrate with your bank accounts and credit cards, automatically importing and categorizing the expenses.
- Establish Expense Categories: Creating a list of expense categories helps organize and allows you to effectively analyze expenses. Common expense categories include office supplies, utilities, marketing, and professional services.
- Collect Receipts: Develop a process for collecting and organizing receipts. It is best to keep a designated physical folder for paper receipts or scan and digitally file them. Many small business owners choose to store receipts physically and digitally. Ensure all relevant details are recorded such as date, vendor, amount, and purpose.
- Reconcile Bank & Credit Card Statements: Regularly reconcile your expense tracking records with bank and credit card statements to make sure it is accurate.
- Consistent Recording: Make it a habit to record expenses as soon as they occur. Waiting too long can lead to forgetfulness or inaccuracies.
- Conduct Expense Reviews: Review and analyze your expenses to gain insights into spending patterns and areas you can reduce spending.
- Seek Professional Advice: If you’re unsure about proper expense tracking or need help with complex accounting matters, consult with a qualified accountant or bookkeeper who can provide guidance specific to your industry.
Digital Business Expenses Tracking
When choosing a business expense tracker application, consider the following features/factors:
- User-Friendly: Look for applications with an intuitive and user-friendly interface. It should be simple to navigate, with clear options to enter and manage expenses.
- Customizable Categorization: Check if the application allows you to create and customize expense categorizations based on your specific business needs. This flexibility will allow you to organize according to your preferences. Look for features such as auto-fill options, receipt scanning, and the ability to categorize expenses.
- Mobile Access: Ensuring your expense tracker is available on your mobile and offers synchronization will allow you to enter expenses and access records anytime, anywhere.
- Bank & Credit Card Integration: This feature automatically imports transactions to the application, reducing manual data entry. Not all expense trackers offer this feature.
- Receipt Management: Look for applications that allow you to attach and store digital or scanned receipts. This provides you with a centralized location for all your expense data.
- Reporting & Analytics: Good expense trackers offer robust reporting capabilities like generating expense reports, identifying spending trends, and visualizing data into graphs or charts.
- Tax Support: It is best to invest in an expense tracker that offers tax related features such as tracking tax deductible expenses and generating tax reports.
- Security & Data Protection: Verify that the application has security measures in place to protect your data. Look for features such as data encryption, secure cloud storage, and two-factor authentication.
- Customer Support & Regular Updates: Read reviews to get an idea of the application’s customer support service. Reliable customer support should be easy to acquire and should assist with any technical issues or questions. Regular updates ensure that the application is up to date and stays compatible with new devices.
Some popular expense-tracking applications businesses are using today are Expensify, Mint, and QuickBooks. Try out a few different applications to see which best suits your business needs. Read reviews and seek recommendations from other small business owners to find expense-tracking applications that align with your preferences.
Analyzing and Reviewing Expense Data
Expense tracker data should be reviewed and analyzed on an ongoing basis to continuously improve your financial decisions. Here are some steps you can take to effectively analyze and review your expense tracker data:
- Review Expense Categories: Examine your current expense categories. Decide whether they still align with your current business needs. Consider any adjustments or additions for better expense tracking.
- Identify Key Metrics: Determine the key metrics or key performance indicators (KPI) you want to track based on your business goals. Common key metrics include total expenses, expense trends over time, and expense-to-revenue ratios.
- Generate Expense Reports: Utilize your expense tracker’s reporting features to generate reports based on your selected key metrics.
- Analyze Spending Patterns: Look for areas where expenses are consistently high or increasing at a face pace. Decide whether these expenses are necessary for your business goals and if there are opportunities to reduce costs.
- Compare Expenses to Budget: Assess whether you are staying within your budget limits. Identify areas where adjustments are necessary.
- Identify Areas to Reduce Expenses: Look for areas where expenses can be reduced without compromising the quality of products or services. This can involve renegotiating contracts or exploring alternative suppliers.
- Evaluate Return on Investment (ROI): Assess the ROI of the different expense categories. Determine if the expenses are generating expected returns. Use this insight to make informed decisions for future investments.
The Bottom Line
Mastering the art of tracking business expenses empowers small business owners with the financial information they need to make the best decisions. By embracing the best practices of business expense tracking, you’ll unlock the potential for strategic growth and improved profitability.
About the Author
Pretha Yasmin is the consumer analyst for SmallBusinessLoans. She has more than five years of experience in marketing and studying consumer behavior for a wide range of industries including finance, construction, and hospitality. She holds a Bachelor of Business Administration in marketing from Brooklyn College.