When you track business expenses, you know whether you’re experiencing profits, how consistently, or spending more than you should. If you’re your own bookkeeper, you need to know how to track your expenses. And even if you do have an accountant, you should still be aware of what’s happening in the books.
Here’s what you need to know about expense tracking, including why it matters and how you can do it efficiently.
The ins and outs of business expense tracking
Sometimes, the hardest part about running a business is ensuring that you have more money coming in than going out.
In a 2019 survey, 86% of small business owners said they wouldn’t be able to cover all their business costs if they lost revenue for two months. Expense tracking can prevent this kind of situation, stopping you from going into unnecessary debt, dipping into your personal funds, or being forced to close up shop.
Expense tracking is a critical stepping stone to measuring your business’s success. Knowing where your money is going — and why it’s going there — directly translates into understanding your business’s financial health.
You know your business expenses: They’re what you spend money on to keep your business running smoothly. Whether it’s rent, utilities, salaries, or one-time expenses like upgrades or new equipment, you need a way to keep track of all of your outflow.
Importance of tracking business expenses
That’s where expense tracking comes in. It’s the process you use to keep a daily record of everything you and your employees spend money on through tracking and reporting receipts, invoices, reimbursements, and credit card statements.
If you’re a business owner, you need to know how to track your expenses so that your numbers are accurate.
If you have an accounting expert by your side, then you might already be familiar with the process. But it’s still a good idea to find out how to use expense tracking so you can improve your business and financial management skills.
So here’s why keeping track of business expenses is so important:
#1: Expense tracking can help you create a budget
There are many different business budgeting methods out there, and you can choose the best one for your business by identifying your habits via expense tracking.
Tracking the amount of money you are bringing in versus how much you’re spending paints a clear picture of your profits and losses, which will influence the type of budgeting method you choose.
#2: Expense tracking identifies your tax deductions
Businesses of all shapes and sizes can save a lot of money with tax deductions. When you prepare your taxes, you’ll need to categorize all of your expenses so you can get the maximum deduction. Since not all business expenses are deductible, your expense tracking and reports can help you organize these details.
#3: Expense tracking manages (and optimizes) your cash flow
Cash flow can make or break a business. Cash flow measures the movement of your funds in your business. A positive cash flow tells you that you have more money coming in than going out (a profit), while a negative cash flow is when you’re spending more than you’re making (a loss).
Expense tracking can help you identify issues and potential cost savings so you can remedy things before any real problems occur.
How to track business expenses
You can use these steps and tips when tracking business expenses:
#1: Use a business bank account and dedicated card
The last thing you want to do as a business owner is mix up your business and personal finances.
This may not seem like a bad idea, since your personal finances depend on how your business is doing. However, it can make long-term money management confusing. It’s no mistake that 60% of companies with excellent financial health create separate bank accounts for business and personal uses.
Separate business bank accounts simplify expense management because you can distinguish between business and personal deductions when it’s time to file taxes. Plus, having a separate account will save you hours of research if you ever get audited.
Additionally, you’ll want a dedicated company credit card. Using a business card is pragmatic. With it, you can:
- Make big purchases when you’re just starting out to help get you on the right track.
- Establish a healthy credit history and score for your business, which increases your odds of receiving loans and higher lines of credit.
- Earn bonuses and rewards for meeting spending quotas (depending on the type of card you choose).
#2: Choose between the cash and accrual accounting methods
Businesses need to choose an accounting method for clear rules when reporting income and expenses. Small businesses with $25 million or less in gross receipts for the three previous tax years can use accrual or cash accounting methods. You can also opt for accrual if you’re a company that holds physical inventory or the business is a corporation.
This cash method records the transaction when the payment is received. Then, expenses are deducted from the tax year that they’re paid. This straightforward process is highly recommended for small businesses just starting out since everything is recorded as it happens.
The accrual method records the transaction on the books when the sale occurs or service is provided. Then, business expenses are deducted in the tax year they incurred it, regardless of when the payment was made. This process requires double-entry bookkeeping, which is right for seasoned business owners.
Ultimately, the cash method is easier to understand, but the accrual method does provide a better economic view of your business’s financial health.
#3: Digitize your receipts with a receipt scanner
Time is money, and investing in a receipt scanner will save you hours of it.
Software designed to read the essential aspects of scanned receipts, such as the receipt’s time, date, location, and total expense, can automate the organization of these essential records and improve the reimbursements process for employees.
There’s no need to categorize your paper receipts or worry about losing them over time with a scanner. You can save every single receipt for years. When you need to, you can easily search and organize all of your expenses with the click of just a few buttons.
#4: Use flexible accounting software to track expenses
The easiest way to categorize and keep all of your expenses in one place is through cloud-based accounting software. More than 92% of businesses use the cloud for everyday business needs like tracking expenses.
A cloud platform allows users to access the software via the internet, meaning that you and your employees can use it anywhere.
Cloud-based expense tracking software is an excellent investment because it automates key management functions. So you can easily track, manage, analyze, and review expenses as they come in since they connect to your bank accounts and update automatically.
Accounting systems like these also have expense reporting tools that help you understand your business’s financial health based on current and past trends. And, with accounting software like Divvy on your side, you can forget about ever missing anything again.
#5: Review your business expenses regularly
Even with the ease of accounting software and other helpful tools, you need to stay on top of reviewing and categorizing your expenses regularly. This means staying on top of expense reporting activities like timely transactions approval as they’re charged or as employees submit them.
Of course, you always have the option to automate these and other tedious aspects of your business expense management like reconciling credit statements using expense management software.
Expense management and accounting software for your every need
Expense tracking is best done with expense management and accounting software because technology can automate your processes for you. This frees you up to focus on running your business.
All your business expense information can be organized in a way that makes it easy to search, review, and analyze your business finances. The best part is that you can track your business expenses in real-time as your employees spend money or payments go out.
With business credits, expense management, spend management, AP automation, virtual cards, and much, much more, Divvy’s cloud-based accounting software has everything your small business could need. Learn more about Divvy today.
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