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There’s nothing worse than being surprised by your credit card statement. Oh wait, that is unless it’s your business statement that shocks you. But if you don’t know how to keep track of business expenses, it’ll feel like a gamble at the end of every month.

Well, it’s time to stop putting it all on red and learn a systematic approach to tracking business expenses — in 5 easy steps, because complicated sucks.

What Are Business Expenses?

First, let’s be clear what we’re talking about here.

Business expenses are any costs incurred while operating your business, including — but not limited to — office supplies, rent, utilities, marketing and advertising expenses, travel expenses, employee salaries, and yes, even the odd fancy dinner (granted a client is there).

Why Is It Important To Track Every Business Expense?

Regardless of the accounting method your business uses — cash accounting or accrual accounting — accurately tracking your business expenses throughout your bookkeeping process requires a plan. One that helps you stay organized, allows you to monitor your cash flow, and clearly understand where your money is going. 

This way, you can make timely, informed financial decisions, identify areas to reduce costs or reallocate resources, and determine eligible deductions against taxable income.

For every minute spent organizing, an hour is earned.

Benjamin Franklin

How To Keep Track of Business Expenses (These Are the 5 Easy Steps)

Ok, you understand the importance of tracking business expenses — now what? These five easy steps will help your small business with accounting and expense tracking so you can use your newly found time for more impactful things.

Step 1: Implement an Expense Tracking System

If you've been storing all your receipts in an old shoebox, it's an excellent time to toss it out — the shoebox, not the receipts — and consider an expense tracking system. You could also use spreadsheet software like Microsoft Excel or Google Sheets. 

My professional advice? When it comes to expense management, implementing a central, robust business expense tracking system is best, as it gives you access to valuable features like receipt scanning and digital storage. There are numerous other benefits, which I'll cover in a bit. 

The system you choose will depend on your business's size and complexity, your employees' skills and capabilities, and your preferences. 

Ease Into It

Ease Into It

I would advise every business to take things slow and plan carefully before jumping on board with a new system. Ensure the solution you choose is scalable to meet your company’s specific needs as it grows.

Key Selection and Implementation Steps:

  • Identify your business’s specific needs (take your time and nail this down)
  • Get quotes and demos from solution providers
  • Evaluate system features and functionality
  • Select a user-friendly system that suits those needs
  • Document, pilot, implement, and test the solution
  • Train users on how to use it
  • Ensure support is in place

Step 2: Set Up Expense Categories

Before entering any expenses in your new expense tracking system, you should establish clear expense categories for consistency and ease of tracking. 

Organizing your expenses into categories and subcategories unique to your business (or industry) allows you to identify and analyze spending patterns quickly. This also makes it faster to isolate areas for potential cost-cutting or optimization.

These are a few of the broad classifications most businesses use:

  • Office supplies
  • Travel expenses
  • Advertising costs
  • General and administrative

Step 3: Use a Receipt Management System

One of the challenges with tracking business expenses is storing and managing receipts. Physical filing systems aren't ideal and can create problems during natural disasters or other unfortunate events. 

But, like I mentioned earlier, most expense tracking systems have built-in receipt management to help you centrally digitize, store, and manage those finicky little devils. This ensures they’re easily accessible and organized for efficient retrieval; anywhere, any time. 

Why Care? Because You Might Have To

Why Care? Because You Might Have To

Some industries require you to maintain digital copies of receipts for compliance and reporting, which are essential for verifying expenses and can serve as evidence during tax audits.

How Receipt Management Works:

  1. Scan paper receipts (or receive them electronically)
  2. Store receipts in digital format
  3. Categorize expense type
  4. Let the system do it’s thang
  5. Click on an expense line item to retrieve, view, or share a receipt copy
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Step 4: Regularly Record and Categorize Expenses

Consistency is key when tracking business expenses. I typically use a checklist of month end accounting transactions to keep organized. On that checklist? Whenever possible, record your expenses as soon as they occur. This practice ensures timely, accurate reporting by preventing the accumulation of unrecorded expenses — also known in the medical world as “I forgot-itis”. 

Take the time to assign each expense to the appropriate category in the beginning, so that you don't have to reclassify them later. Enter all expenses in the most relevant category for accurate financial statements, reporting, tax returns, and compliance. 

Save the interns!

In my first job post-university, my boss had me organize and classify every single receipt, because he hadn’t done it in the beginning. Can confirm: It will make your young, impressionable new hire dislike you.

Simon Litt

Step 5: Reconcile and Review Expenses

Working in accounting and financial reporting, I know it can be tempting just to move on after you complete the steps in your accounting cycle, but reviewing and analyzing your monthly expenses helps you:

  • Analyze spending patterns 
  • Identify any discrepancies or errors
  • Isolate areas of overspending
  • Uncover cost-saving opportunities
  • Identify any potential fraudulent activities or unauthorized charges
  • Gain more control to stay competitive 

Control your expenses better than your competition. This is where you can always find the competitive advantage.

Sam Walton

What Reconciling Expenses Looks Like Once Completed:

  • When running your profit and loss statement, you should quickly be able to see which category of expenses seems out of the ordinary compared to the previous months.
  • You'll then need to analyze the expenses to determine if higher expenses are valid or if some expenses are in the wrong category.
  • If the wrong category, reclassify (move) it to the right one.
  • Re-run the profit and loss report, analyzing and validating the results again.
  • Before month end close, all expenses of the same type are grouped under the most appropriate category.

I know it sounds super boring, but you know what happens when you don’t take the time to check the details? Your new, flashy CFO shows up in a limousine that he has no business affording. Allegedly.

When Accounting Software Becomes Necessary

Whether your business is large or small, manual expense tracking can still be cumbersome and inefficient. Accounting software can be a game-changer.

Most accounting software offers a range of features that simplify and automate the expense tracking process in any size business. These tools can automatically import transactions from business bank accounts and business credit cards, categorize expenses, generate expense reports, and provide real-time visibility into your business's financial management and health. This saves you significant time and effort and allows you to focus on what you'd rather be doing — running your business.

When you're evaluating accounting software, look for solutions that align with your business needs and size. Factors to consider include:

  • Ease of use
  • Scalability
  • The type of accounting software you're after
  • Integration with other software
  • Pricing (Software-as-a-Service or SaaS subscriptions are highly affordable options)
  • The type of platform (on-premise or cloud-based)

Or, y’know, let us check them out for you.

💡Tip: Many accounting software providers offer demos and free trials. Take advantage of this to test features and functionalities before committing to a purchase.

When Is an Accounting System Unnecessary?

Maybe you're tracking your business expenses manually and doing fine — but is 'fine' really all you want? I've worked in companies of all sizes and industries and owned different small businesses, and I can tell you expense tracking is never a waste of time, in any size business. Even freelancers need to keep track of what they're spending and where. 

Why? Two reasons:

  1. If you're a small business owner — time and money are in short supply, and you can't afford to waste either. You actually need to keep a closer eye on every dollar and minute to stay competitive and profitable.
  2. Accounting systems are highly affordable and easy to implement.

Benefits of Tracking Business Expenses Closely

Efficiently tracking your business expenses offers a range of benefits beyond just being organized. Here are a few worthwhile advantages that I've seen over the years:

Increased Financial Clarity

Maintaining accurate records, especially as a small business owner, enables you to understand your business's true financial health. As a small business owner, this clarity has helped me with the following:

  • Making smarter, more prudent decisions
  • Identify areas for improvement
  • Plan for the short and long-term future

Better Cost Optimization

Regularly reviewing expenses has helped me identify areas where costs must be reduced or eliminated. By analyzing spending patterns and evaluating the return on investment for various expenditures, I've made better strategic decisions that increase profitability. 

This especially matters if your business is small and funds are very limited.

Improved Cash Flow Management 

You may be focused on your profit and loss statements, but it's important to recognize the significance of paying attention to your cash flow statement. Tracking expenses allowed me to:

  • Monitor cash flow more frequently
  • Ensure that I have sufficient funds for daily and weekly operations 

By closely tracking your business expenses, you can confidently complete a cash flow statement, know how well your business is doing, and see where costs need to be reined in (or cut altogether).

We were always focused on our profit and loss statement. But, cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.

Michael Dell

Greater Tax Compliance

The tax man doesn't need your money — but he'll take it if you make it easy. – Me

Proper expense tracking has helped me comply with tax regulations more easily, minimizing the risk of penalties or audits. It also ensured my business was able to:

  • Claim eligible tax deductions and credits
  • Keep more cash flowing

Take it from me: during tax season, you’ll be relieved to have a business expense tracking solution.

Successful Audits and Financial Reporting

If your business has shareholders and is publicly traded, reputation is essential. Consistently well-documented expense records provide transparency and credibility in the event of an audit or financial reporting requirement, helping your business avoid penalties and build trusting relationships.

Trust is the glue of life. It's the most essential ingredient in effective communication. It's the foundational principle that holds all relationships.

Stephen Covey

Did I mention one of the biggest benefits of implementing business expense tracking software is that it streamlines your processes, significantly reducing time-consuming manual work?

Expense-Tracking Best Practices

To kick my expense tracking process up a notch, I've implemented these best practices:

1. Open a Business Only Account

Opening a business checking account to track your business income and expenses can help you understand your cash flow situation at any given point. Having business accounts also ensures that you are accounting for just your business transactions, not your personal ones. 

2. Establish Clear Expense Policies

I develop clear expense policies and communicate them to all employees. These policies should outline the following:

  • Your expectations of their usage of company funds
  • Which expenses are eligible for reimbursement
  • The documentation required
  • The approval process

3. Regularly Update Your Expense Categories

As my business evolved, so did my expense categories. Whenever a meaningful operational shift happened, I reviewed and updated the categories to accurately reflect my business's changing needs.

4. Back Up All Data

Accurate and reliable data is essential for future decisions. I believe in regularly backing up data to prevent potential loss or corruption. Cloud-based storage solutions provide a secure, convenient, and cost-effective way to store data anytime and from anywhere in real time.

5. Regularly Analyze Reports

I would review my monthly business expense reports to look for trends, anomalies, or areas where costs could be reduced. This analysis helped me make data-driven decisions to improve my future decisions.

6. Regularly Reconcile Financial Records

I reconciled my credit card and bank statements each month to ensure accuracy, identify any discrepancies or errors, and promptly correct them if needed. This allowed me to review spending patterns and identify areas for cost reduction.

7. Educate Your Team

If you have employees or freelancers, go ahead and create those written, formal processes — and make sure they read them, too.

Mistakes To Avoid

Like every other business owner, I've made my share of small mistakes… Okay, yes, some bigger blunders too. I’m human, alright? 

Your job is to learn from my — and other peoples’ — mistakes, so you aren’t destined to repeat them. Here are some of the most common, pernicious ones:

Neglecting Small Expenses

Beware of little expenses. A small leak will sink a great ship.

Benjamin Franklin

One common mistake businesses make is neglecting to track small expenses. Even if yours is a large business and the expenses may seem individually insignificant, they can add up over time, impacting your overall financial health. 

I make sure to capture even the smallest expenses to get a complete and accurate picture of my business's financial position.

Mixing Personal and Business Expenses

While your business may be a labor of love, try never to mix your business expenses with your personal expenses. It's a very common mistake, especially for self-employed sole proprietors. 

I separate business expenses to establish clarity. This is particularly important when it comes to tax time and deductions.

Inconsistent Categorization

If you or your team categorize expenses inconsistently, it can lead to confusion about your financial analysis and reporting. Make sure you identify and document clear guidelines about the types of expenses and where they should be coded in your chart of accounts. 

Properly classified expenses make account analysis faster and easier for budgeting and cost control purposes.

Incomplete Record-Keeping

Failing to maintain complete records of expenses is a significant mistake. Incomplete record keeping can lead to these and other serious issues:

  • Reduced visibility
  • Missed payments 
  • Poor vendor relationships
  • Cash flow issues
  • Missed deductions
  • Reduced investor confidence
  • Financial mismanagement
  • Failed audits

If there's one thing I've learned from implementing accounting systems, it's that maintaining complete records requires well-designed technology that integrates with other systems in use.

Irregular Account Reconciliations

Neglecting to reconcile expense records regularly can lead to discrepancies, errors, and a limited view of your business's financial picture. 

After each month's end, I set aside time to reconcile business expenses with bank and credit card statements, to identify variances and ensure all expenses are accounted for accurately. It’s a worthwhile exercise. 

By implementing efficient expense tracking steps, following best practices, and avoiding common mistakes, you'll be able to make informed financial decisions, increase profitability, and manage your cash flow.  

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Moira Alexander
By Moira Alexander

Moira Alexander is a recognized thought leader and the founder of PMWorld 360 Magazine and Lead-Her-Ship Group, a digital content marketing agency.

Leveraging her 17 years of experience in accounting, financial reporting, and financial systems implementation, Moira has written content for fintech businesses for over ten years and been named one of the top global female B2B content thought leaders and influencers.