How to track business expenses
Tracking business expenses is critical for maintaining a business’s financial health and ensuring long-term sustainability. Effective expense management helps businesses allocate resources wisely, invest in growth opportunities and prepare for unexpected challenges.
Not properly tracking expenses can lead to misallocated funds, missing out on tax deductions and inaccurate financial records. Here’s more information about managing and tracking your business expenses to help ensure your company can reach its goals.
What you’ll learn:
- Properly tracking your business expenses is critical to ensuring the financial health of your business.
- Opening a separate business account and credit card can help track and manage business expenses accurately.
- Integrating accounting software to automate and streamline expense management can reduce manual processes and increase accuracy.
- Developing clear protocols and policies for expense reporting and reimbursement can ensure employees understand how to handle business expenses.
What are business expenses?
Every company incurs costs throughout the course of doing business. No matter whether you’re a large corporation, a local small business or a sole proprietor, you’ll have expenses you’ll need to track and manage for tax purposes and to ensure you understand where your funds are going.
Expenses can be recorded on the business’s income statement, which is also used to determine the business’s taxes.
Examples of common business expenses
A few examples of common, fully deductible expenses that all businesses should track include:
- Office supplies
- Employee wages
- Travel expenses
- Mortgage, lease and utility costs
- Training courses for employees
- Maintenance and repair costs
- Employee benefits
- Advertising and marketing
- Interest fees
- License, regulatory and some legal fees
The Internal Revenue Service (IRS) offers a Guide to Business Expense Resources that business owners may reference to help them determine what qualifies as a business expense.
Why track company expenses?
Tracking company expenses is vital for maintaining a clear understanding of your business’s financial health; for example, you can learn where you may need to invest more and where you may need to scale back. Tracking company expenses allows you to:
- Gain insights into your business’s profitability. Monitoring expenses provides a clear picture of your company’s profitability.
- Prepare for tax season. Properly tracking company expenses helps you stay ahead of the game when tax time comes around and identify tax-deductible expenses.
- Track cash flow. Daily tracking of expenses allows you to analyze and optimize the money moving in and out of your business during a specific time period (your cash flow).
- Budget. Looking at areas where you’re spending the most could help you identify areas to cut costs and maintain or tighten your budget.
How to track business expenses
Tracking business expenses means developing a system to monitor income and expense transactions. Here are some things to consider once you’re ready to get started:
Opening a business bank account and credit card
Your first step is to open a business account solely for your business transactions; this includes a business checking, savings and merchant services account. With a separate account, your business expenses can be organized in a single place.
Next, open a credit card specifically for business expenses to simplify sorting receipts. With a dedicated business credit or debit card, you can build your business’s credit history, allowing you to access rewards and benefits, such as cash back on purchases and benefits for travel or other business-related expenses.
Choosing accounting software
Integrating your financial institutions with accounting software optimizes efficiency and improves accuracy by reducing the manual work required and increasing the precision of your financial data. Accounting software solutions streamline the process of tracking, organizing and paying expenses, whether they are invoices from a supplier, rent payments or payroll.
Additionally, accounting software provides reporting tools that offer insights into spending patterns, track financial performance and generate detailed expense reports. These tools help you monitor budgets, identify trends and make informed decisions to enhance your business operations.
Keeping track of receipts
Keeping track of receipts involves organizing and storing all the paper or digital records of transactions your business makes. This practice is essential for effective financial management and provides several benefits, such as:
- Expense verification: Receipts are proof of purchase and verify expenses when reconciling accounts or during audits.
- Tax preparation: Organizing your receipts helps you claim tax deductions and credits. Receipts provide the necessary documentation to substantiate expenses when claiming a deduction or in case of an audit.
- Budget management: Analyzing receipts can help you understand spending patterns and identify where you can cut costs or need to allocate more resources.
- Reimbursement processes: If you or your employees incur business-related expenses, receipts are necessary to process reimbursements accurately and fairly.
- Legal compliance: Keeping track of receipts helps ensure compliance with financial regulations and industry standards, protecting your business from legal issues related to improper financial documentation.
Creating an expense policy
Creating an expense policy means establishing protocols for employees to spend company money on business-related expenses. An expense policy defines allowable expenses, such as travel, meals and office supplies, and sets spending limits to control costs.
Additionally, an expense policy should outline the approval process for expenses and reimbursement procedures, detailing how and when employees will be reimbursed for out-of-pocket expenses.
Is it worth it to automate expense management processes?
No matter the size of the business, maintaining expense policy compliance and reducing the risk of expense fraud is usually a top priority. Automated expense management can help ensure expense data accuracy and policy compliance.
Leveraging an automated solution can decrease manual workload by identifying errors, violations and duplicates before approval, providing a more efficient and streamlined approval process.
The decision to automate will depend on your business’s specific needs. If you’re interested in getting started with automated expense management solutions, there are ways to do so without breaking the bank. Free accounting software platforms with limited essential capabilities are available, and some offer the opportunity to upgrade to paid tiers for additional features as your needs grow.
Managing business expenses FAQ
Properly managing your business’s expenses is essential to its health and longevity, whether you are self-employed, a small company or an enterprise corporation. Some questions people have about managing business expenses include:
How can I manage business expenses if I’m self-employed?
To manage expenses if you’re self-employed, consider expense management software to help you track your spending. Additionally, keep a detailed log of business expenses to help you maintain accurate financial records, especially at tax time.
Key takeaways: How to track business expenses
To manage business expenses effectively, start by opening a business account and a business credit card. Then, consider accounting software to automate and streamline your expense-tracking processes. Lastly, develop protocols and policies that make it easy for your employees to understand how to use a company credit card—or their funds for company expenses—and how to be reimbursed.
Ready to get started? Learn more and compare Capital One Business credit cards today.
