As a business owner, managing your business expenses can make the difference between success and bankruptcy. Even the most inspired, talented business endeavors can fall short if they cannot navigate the basics. We understand this implicitly and want to make expense management as easy as possible for business owners of all shapes and sizes.
Today we’re sharing a guide for keeping track of your business expenses with proper techniques, technology, and workflows that will keep you afloat and aware of every dime you spend. As they say, knowledge is power, and that certainly applies to your business expenses.
What are business expenses?
Business expenses are all of the purchases necessary to operate your business (sometimes referred to as operating expenses, or OPEX).
Business expenses include:
- Payroll for staff
- Fees for attorneys, licensing, accounting, etc.
- Rent, mortgage, building maintenance
- Marketing, research & advertising (including for social channels like Facebook)
- Office supplies
- Property taxes on real estate
- Vehicle expenses
- Travel expenses
- Cost of Goods Sold (COGS) = anything necessary to create, sell or distribute your goods or service, such as materials, labor, packaging, etc.
Why is it critical to track your business expenses?
Your business expenses are key to understanding how much it costs to run your business and how to maintain profitability. First, business expenses must be paid to keep the lights on, literally and figuratively. Business owners who miss payments for their location, vehicles, or outstanding invoices will soon be unable to operate normally. Second, expenses and the way you pay them can impact your business credit score and ability to acquire funding. And finally, your business expenses give meaning to your revenue. Without your outgoing subtractions from business expenses, your revenue is just a number.
This is why most lenders and investors need to see a healthy ratio of business expenses to revenue in order to take a chance on a company. Smart business owners can also use detailed business expenses to look for areas to cut costs and maximize profits.
What are deductible business expenses?
Many of your business expenses may be tax deductible, saving your small business tens of thousands of dollars every year–but you have to track and file them carefully. Keeping careful track of your business expenses can ensure that you maximize your deductible expenses.
The IRS allows businesses to deduct costs incurred throughout the year which are ordinary and necessary to the business. As you can imagine, your small business expenses are largely ordinary and necessary for your industry, so the amount of your deductible expenses is quite high.
Common deductible expenses:
- Mileage and vehicle expenses
- Entertainment expenses
- Rent and utilities
- Marketing expenses
- Employee pay and benefits
- Miscellaneous or general office expenses
You want to be certain these tax deductions aren’t slipping through your fingers while you’re making these regular business expenses anyway. Carefully tracking your business expenses will give you better visibility into your financial health, and will make it incredibly easy to properly file for deductions come tax season.
How to track small business expenses
No matter where you stand with expense tracking, there is room for improvement. Upgrading the way you track your business expenses can improve the profit margins for your small business. Here are the critical steps to effectively tracking expenses in the short and long term.
1. Open at least one business bank account
Every business needs a specific and dedicated bank account, whether a business savings or business checking account. All business transactions should be in and out of that bank account, if possible. If you already have a business bank account, don’t be afraid to shop around for more business-friendly banking (lower fees, more competitive rates, perks, etc.).
2. Choose your method of accounting
Many small business owners manage their own accounting, especially while getting off the ground. Anyone can utilize simple spreadsheets like Excel or Sheets to manage business income and expenditures, however these may pose a risk to accuracy. There are free versions of accounting software for small businesses on a budget. As your business grows, it’s worth investing in high-powered accounting software or hiring a finance team of accountants to help manage your business expenses.
3. Categorize each business expense carefully
Many of your expenses as a small business will be tax deductible–but you have to be able to show it. Regardless of the accounting system you choose, you need to find a way to properly categorize each expense and to retrieve it when the time comes for tax filing. Eventually, you will also need to categorize by department, individual, and specific budgets, so keep that in mind as you begin tracking expenses more carefully.
4. Streamline expense reports
Expense reports are a significant element of business financials. You must find a way to report and manage any of the many business expenses listed above. Paper, electronic, or some combination of each can work depending on your business needs. Create a workflow that allows employees to spend what they need and track it efficiently so that your business can operate in top shape.
Even better? Ditch your expense report altogether with Divvy. Our software links a business credit card with automatic expense tracking.
5. Connect your bank to software
If you have to manually reconcile your transactions and accounting, you’ll be wasting valuable hours every single week. Instead, choose an expense management system that allows you to integrate with your bank. Don’t worry–these types of integrations are built with security in mind, and can help you see all of your expenses at a glance without double data-entry.
6. Track purchases and reimbursements beyond the bank
What do you do with business expense receipts? How do you reimburse your employees? How do you document invoices? It’s time to figure out how to manage your expenses that don’t go directly through your bank. Some apps allow for expense receipt scanning, or can link a mileage tracker and corresponding reimbursements through expenses. Experiment with solutions that allow for careful expense tracking and reports so that you are able to see all the transactions in one place.
7. Daily and monthly accounting
A mark of smart expense management is always knowing exactly where you stand financially. Simply setting up automatic expense management or fancy automated accounting software won’t tell you much if you don’t use them strategically and consistently. Create workflows that allow you to record expenses every single day so that you don’t get behind or forget to account for expenses days or weeks later. At the end of the month, be sure to reconcile all accounts to identify unpaid invoices, checks that haven’t cleared, and any other notable transactions.
When should you invest in business expense software?
Business expenses are a critical component of every business, but they can be an even stronger pain point for some. Investing in an expense management system or accounting software is necessary for certain businesses because, in the long run, they save you money and can even protect you legally.
You should adopt expense management software if:
- Your business is growing rapidly or you project a significant growth phase soon.
- You utilize multiple business bank accounts and/or financial institutions.
- You manage expenses and reimbursements for multiple employees.
- Your business relies on travel.
Generally, the need for accounting software systems tracks with the size and complexity of the company. Smaller businesses that are just beginning or function as a side hustle or hobby may function well without the formal accounting system. But as soon as you start introducing the moving parts of multiple employees, multiple accounts, travel, reimbursement, expense reports, and other complex realities of operating a small business it will be time to offload some of your day-to-day expense tracking to smart software.
Using software vs. spreadsheets
Spreadsheets can be an effective way to monitor expenses, especially if you’ve mastered the formulas and tricks for integrating a variety of sheets and equations. However, there are some risks you take when you center your financials in a manual spreadsheet rather than smart business software. The biggest risks you take are human error (which can still happen with expense software, but is much more likely to be caught and flagged by the system) and the inability to see all of your data in one place. The ability to synergize your various expenses and revenue is a major feature for financial software, and many include instant graphics and charts to help you visually interpret data.
Reimbursements can be messy and frustrating. Often the expenses are being reported well after the fact, and the method of payment and reimbursement is much more tedious to manually track in a spreadsheet. Financial software can help you track and complete reimbursements to employees that will keep everyone honest and fast track the transactions, so you know exactly where your budgets stand.
Nearly all businesses encounter a need to manage mileage as they grow, especially sales and fulfillment business operations. While it is possible to track mileage through paper or email reporting and entering data manually into spreadsheets, most expense tracker software features mileage tracking and reimbursement to streamline some of the math that comes with mileage reimbursement, saving you time and errors.
Compiling expenses for taxes
It’s simply easier to complete your taxes when you utilize a financial software system for accounting. In fact, many of these expense management apps were designed with tax reporting in mind. Your expense tracker app will facilitate categorization and searching, allowing you to quickly locate and group transactions that can be deducted, and other totals relevant to your yearly tax filings. You might find that financial software helps you maximize your tax return and qualifying deduction come tax time.
If you’re not sure about investing in business expense software, consult with a trusted accountant or financial leader in your company. There are low-cost and even free options for expense management that can help you carefully track expenses and maximize revenue right away.
Divvy is your answer to tedious bookkeeping, delayed expense reporting, frequently going over budget, and never knowing where your business’ money is going. We make it easier to spend smarter. Try out Divvy for free.