How to Track Business Expenses: 7 Steps for Success

Tracking business expenses is an integral part of maintaining a small business, and as a small business owner, you can’t afford to ignore it. Learn how to start tracking expenses with these steps.

You may use a variety of methods to track business expenses. Still, to manage your business adequately, keep track of expenditures, and ensure account expenses accurately, you will need to create an expense tracking system that works for you.

Here’s how you can track your business expenses:

1. Open a business bank account
2. Choose an appropriate accounting system
3. Choose cash or accrual accounting
4. Connect financial institutions
5. Begin managing receipts properly
6. Record all expenses promptly
7. Consider using an expense app

Overview: What are business expenses?

Part of the bookkeeping process is tracking business expenses correctly. Any expenditure that is related to your business is considered a business expense.

Here are some ordinary business expenses you are likely to encounter:

• Advertising
• Bank fees
• Commissions
• Consulting fees
• Contract labour
• Dues and subscriptions
• Mileage
• Office supplies
• Postage and delivery
• Printing and copying
• Salaries
• Software
• Travel
• Utilities

While these are the more common business expense categories, any purchase associated with your business is categorized as a legitimate business expense.

How to track your small business expenses

The best way to track your business expenses is to use small business accounting software, making it much easier to track your expenses, classify them correctly, and have access to up-to-date financial information. It’s imperative at tax time since you’ll want to be sure to take all of the expense deductions that you can.

You can also track expenses manually; however, that’s only recommended if you have few business expenses to track.

Step 1: Open a business bank account

As a new business owner, you will need to open a business bank account. Once that account is operational, you should use it exclusively for business transactions.

While there may be an instance when you use your personal bank account for business purposes, having a separate business account will make it much easier to track and record your expenses correctly.

Step 2: Choose an appropriate accounting system.

You have a choice about what kind of accounting system to use for your business. While the best option is to choose an accounting software application that will work for your business, you can also use spreadsheet software, such as Microsoft Excel, to record income and expenses for your business.

The Wave Accounting user interface allows you to set up both income and expenses easily. Source. Wave Accounting software.

If you wish to use accounting software, but it’s just not in your business’s budget, opt for a free application such as GnuCash or Wave Accounting.

Step 3: Choose cash or accrual accounting.

When setting up your accounting system, you’ll also need to choose either cash accounting or accrual accounting.

Most small businesses, sole proprietors and freelancers use cash accounting as it’s straightforward. When you use cash accounting, you record transactions when they occur. For instance, you record income when it’s received, and you record payments when they’re made.

Accrual accounting is a bit more complex, and it’s a necessity for growing businesses, businesses with employees, or larger businesses. With accrual accounting, you record income when a product is sold, not when you receive payment for that product. The same goes for expenses recorded when you receive the bill, not when you pay the bill.

Step 4: Connect your financial institutions

You can simplify small business expense tracking by connecting your financial institutions with your accounting software. While some may be uncomfortable with this option, it’s very safe, with safeguards built in to protect your data.

If you do connect your bank, you’ll be able to download all banking transactions directly to your accounting software automatically, and in many cases, have them automatically posted to the appropriate account.

This process makes it easy to account for every expense incurred by your business.

QuickBooks Online allows you to import all expenses from your bank account quickly. Source: Quickbooks Online software.

Many popular accounting software applications, including QuickBooks Online, Xero, and FreshBooks, along with many others, allow you to connect your bank accounts for manageable business expense tracking easily.

Step 5: Begin managing receipts properly

Another way to ensure that you’re accurately tracking your business expenses is to use the mobile app that is available with your accounting software application. If your software doesn’t offer such an app, you can choose to use an expense management application to integrate with your software.

These apps typically allow on-the-go expense management, allowing you to take a picture of a receipt and upload the image to your software, where it will be stored and later attached to the appropriate expense. If it’s a reimbursable expense, you can use the receipt for creating an expense report.

Step 6: Record all expenses promptly.

In Accounting 101, you learned to account for all income and expenses. You can do this in many ways. Choose to connect your financial institutions to your software application. This process becomes reasonably automated, though you will have to set up your accounts properly to upload transactions correctly.

Kashoo allows you to enter your expenses manually rather than connecting with your bank. Source: Kashoo software.

Some applications offer the option to enter expenses manually. This is a good alternative for those who choose not to import transactions automatically. In most cases, you can also choose to import your bank statement at the end of the month and record your expenses at that time.

Finally, completing your bank reconciliation every month helps you to account for all transactions appropriately.

Step 7: Consider using an expense app.

While not necessary for everyone, if you travel a lot for business, it may be worth investigating some of the expense apps on the market, especially those designed to track travel expenses such as mileage, flight expenses, meals, and entertainment and other related business expenses.

Should you use accounting software for tracking business expenses?

As you can see, you have many ways to keep track of your business expenses, both manually and by using accounting software.

When accounting software is best:

While using accounting software is always best for any type of business tracking, including income and expenses, there are times when it is a must. You should consider using accounting software if any of the following situations apply to you or your business:

• You travel for business frequently: Let’s face it, everyone loses receipts. If you’re tired of carrying a stack of receipts in your wallet or your purse, accounting software is your best bet. Especially important if your business requires you to travel frequently.
• You have multiple employees that need to track expenses: If you have multiple employees that need to track business expenses, you must use accounting software. While a spreadsheet may be adequate for a single-person operation, it simply will not work if you’re tracking expenses for multiple employees.
• Your business is undergoing a growth phase: You may be small now, but if you’re planning on or currently undergoing a growth phase, you’ll want to invest in accounting software and begin tracking your expenses properly.
• You have multiple business bank accounts: Tracking expenses from one institution can be time-consuming if done manually. It’s next to impossible if you have more than one business bank account. So do yourself a favour and use accounting software.

When to seek other methods:

While accounting software is the best business expense tracking solution, there are occasions when you can get by using spreadsheet software.

If any of the following situations apply to you, manually tracking your business expenses may be the right choice.

• You incur few expenses: If you’re starting out and only need to track the occasional expenses, using a spreadsheet may be adequate. But if business expenses start to increase, you should consider making the switch to a software application.
• You’re an Excel whiz: It’s no secret that Excel can perform many calculations. If you’re an Excel whiz, you can likely set up a spreadsheet that works for your business. However, since most of us aren’t Excel whiz, accounting software may still be your best bet.
• Your business is more of a hobby: If you’re a dabbler and haven’t fully committed to your business just yet, tracking expenses manually may be just fine. But for everyone else, accounting software should be at the top of your list.

Tracking business expenses is a big part of your business.

Whether you’re just starting, are in the process of building your business, or are a well-established business, you need to track your business expenses.

So take a few minutes and put a plan in place that will allow you to track your business expenses quickly and accurately.

Source: fool.com