Lesson 6: How to Track Your Small Business’ Expenses

Proper expense tracking not only helps you manage your cash flow but also simplifies tax preparation and provides valuable insights into your business operations.

Expense Tracking Checklist

Why Expense Tracking Matters

Before diving into the how-to’s, let’s understand why expense tracking is so important for small businesses:

1. Financial clarity: Knowing where your money is going helps you make informed decisions about your business.
2. Tax compliance: Accurate expense records make tax season less stressful and help you claim all eligible deductions.
3. Budgeting: Understanding your spending patterns allows you to create and stick to realistic budgets.
4. Profitability analysis: By tracking expenses, you can identify areas where you’re overspending and optimize your operations.
5. Investor relations: Well-maintained financial records instill confidence in potential investors or lenders.

Setting Up Your Expense Tracking System

Choose Your Method

There are several approaches to tracking expenses. Choose the one that best fits your business needs and your personal preferences:

Manual Methods

• Spreadsheets: Use Excel or Google Sheets to create custom expense tracking templates.
• Pen and paper:This method is not recommended as it makes it hard to share data with advisors and service professionals.

Digital Solutions

• Accounting software: Xero is a great option that offers comprehensive financial management tools.
• Expense tracking apps: Dedicated apps like Expensify or Receipt Bank focus specifically on expense management.

Set Up Expense Categories

Organizing your expenses into categories makes it easier to analyze your spending and prepare for taxes. Common categories include:

• Office supplies
• Advertising and marketing
• Travel expenses
• Utilities
• Rent or lease payments
• Employee salaries and benefits
• Professional services (legal, accounting, etc.)
• Equipment and maintenance

Tailor these categories to fit your specific business needs.

Establish a Record-Keeping System

Develop a system for storing and organizing receipts and invoices. This could involve:

• Physical filing: Use folders or binders to store paper receipts, organized by month or category.
• Digital storage: Scan receipts and store them in cloud-based services like Google Drive or Dropbox.
• Receipt capture apps: Use apps that allow you to photograph and categorize receipts on the go.

Whatever you do, DO NOT use the ‘shoebox method’ (keeping tangible receipts tucked away somewhere without any organization).

Best Practices for Tracking Expenses

Record Expenses Promptly

Don’t let receipts pile up. Make it a habit to record expenses daily or at least weekly. This practice helps:

• Prevent lost or forgotten expenses
• Keep your records up-to-date
• Reduce the time spent on bookkeeping tasks

Separate Personal and Business Expenses

Mixing personal and business expenses can create accounting nightmares. To avoid this:

• Open a separate business bank account
• Use a dedicated business credit card for all business-related purchases
• If you must use personal funds for business expenses, document these transactions carefully

Leverage Technology

Take advantage of technological tools to streamline your expense tracking:

• Bank and credit card integrations: Many accounting software solutions can automatically import and categorize transactions from your financial institutions.
• Receipt scanning: Use OCR (Optical Character Recognition) technology to extract data from receipts automatically.
• Mobile apps: Track expenses on the go using smartphone apps that sync with your main accounting system.

Review and Reconcile Regularly

Set aside time each month to review your expense records:

• Reconcile accounts: Ensure your recorded expenses match your bank and credit card statements.
• Check for errors: Look for any duplicate entries, miscategorizations, or missing expenses.
• Analyze trends: Identify any unusual spending patterns or areas where you might be able to cut costs.

Keep an Eye on Cash Expenses

Small cash purchases can easily slip through the cracks. To track these:

• Keep a small notebook or use a mobile app to log cash expenses immediately
• Collect receipts for all cash purchases, no matter how small
• Regularly transfer these records to your main expense tracking system

Advanced Expense Tracking Strategies

Implement Project-Based Tracking

If your business handles multiple projects or clients, consider tracking expenses at the project level:

• Assign expense categories to specific projects or clients
• Use time-tracking tools to allocate labor costs accurately
• Generate project-specific financial reports to assess profitability

Forecast Future Expenses

Use your historical expense data to predict future costs:

• Identify seasonal trends in your spending
• Plan for large, irregular expenses (e.g., annual software subscriptions, equipment upgrades)
• Create monthly or quarterly expense forecasts to improve your budgeting

Automate Expense Approvals

For businesses with employees, streamline the expense approval process:

• Set up an automated workflow for submitting and approving expense reports
• Establish clear policies for reimbursable expenses
• Use software that allows for mobile submission and approval of expenses

Overcoming Common Expense Tracking Challenges

Dealing with Missing Receipts

Despite your best efforts, you may occasionally lose a receipt. In these cases:

• Check your bank or credit card statement for the transaction details
• Contact the vendor for a duplicate receipt
• For small amounts, create a log of the expense with as much detail as you can remember

Handling Recurring Expenses

For subscription-based services or other recurring expenses:

• Set up automatic tracking in your accounting software
• Review these expenses periodically to ensure you’re still getting value from the service
• Look for opportunities to negotiate better rates or find more cost-effective alternatives

Managing Mileage and Travel Expenses

Tracking business travel expenses requires special attention:

• Use a mileage tracking app for accurate records of business-related driving
• Keep detailed logs of travel expenses, including meals, lodging, and transportation
• Familiarize yourself with tax rules regarding deductible travel expenses

Final Thoughts

By implementing an expense tracking system and following best practices, you can gain better control over your finances, make informed business decisions, and set your company up for long-term success. Remember, the key is to find a method that works for you and to maintain consistency in your tracking efforts. With the right approach, expense tracking can transform from a dreaded chore into a valuable tool for business growth and financial stability.