Small Business Expense Tracking: A Comprehensive Guide

Establishing an effective expense-tracking system yields multiple business benefits. It creates the foundation for streamlined budgeting, bookkeeping, and accounting while also helping you spot fraud and tax advantage opportunities. Additionally, by painting a clear picture of your financial health and cash flow, expense tracking provides your business with the information it needs to make smarter strategies and decisions.

What Is Small Business Expense Tracking?

Small business expense tracking is the process of recording and organizing all business expenses. The process aims to create an accurate picture of how much your business spends, what it spends on, and when, so you can use the information for smarter financial planning.

For example, one significant component of small business expense tracking is expense categorization. Common business expense categories would include:

• Rent and utilities
• Payroll and benefits
• Insurance
• Maintenance and repairs
• Legal and professional expenses
• Marketing and advertising
• Business meals
• Travel
• Licenses and permits

This gives you an understanding of what areas your business spends most money on while also helping you spot potential tax deductions.

Benefits of Tracking Small Business Expenses

Tracking your business expenses is the first step in ensuring financial health. It contributes to multiple vital financial management tasks, from tax compliance to bookkeeping. Below are some of this activity’s biggest benefits to your business.

Tax Compliance

Diligent expense tracking leads to accurate bookkeeping, enabling you to submit error-free documents during tax season. It decreases your risk of noncompliance, sparing you from fines and other penalties.

Another solid benefit of small business tracking is that it allows you to maximize tax benefits. In sorting your transactions, you can more readily identify items that qualify for tax deductions and credits.

Bookkeeping and Accounting

Tracking expenses is a major part of bookkeeping. The practice gives you a clear picture of how much cash flows from your business and what you gain from the expenditures.

Establishing a thorough expense tracking system streamlines the bookkeeping process. When you record data accurately and promptly, you can move the information to your books more efficiently. Saving time and labor affords your bookkeepers and accountants more energy to work on higher-impact tasks, such as financial analysis, planning, and forecasting.

Budgeting

Expense tracking gives your business the necessary data to forecast spending patterns accurately. Records will show what you spend on, how much, and when. You can use this data to build budgets that maximize profit and minimize overspending.

For example, a brick-and-mortar store might see increased electricity use during summer due to the need for air conditioning. The business can use this information to build smarter budgeting strategies, such as lowering spending in other areas or setting more aggressive sales targets.

Fraud Prevention

Having a record of your spending patterns makes tracking anomalies easier. You can compare historical data with new records to identify out-of-place entries. If receipt-tracking is part of your expense-tracking process, you can match these documents against the entries on your books.

Types of Small Business Expense Tracking Tools

Traditionally, businesses tracked expenses manually using pen and paper. Now, you can supplement the process using digital tools like bookkeeping software, spreadsheets, and online banks.

Bookkeeping Software

The best tool for tracking business expenses is bookkeeping software. Today’s business bookkeeping software typically offers the following expense-tracking features:

• Bank Feeds: You can sync your bookkeeping software to multiple bank accounts to import data automatically. This connection spares you from the manual load of data entry.
• Expense Categorization: After importing financial information from your bank accounts, you can categorize your transactions. Some platforms offer auto-categorization features that classify transactions automatically based on custom rules. You can also track transactions that are eligible for tax deductions.
• Receipt Capture: You can use your phone to snap photos of receipts and attach them to existing records.
• Cash Flow Reporting: Bookkeeping software uses your data to create charts and reports that reflect your spending. The visualization helps you analyze your spending patterns at a glance.

Spreadsheets

If you only need basic functions, spreadsheets like Excel and Google Sheets make for decent business expense-tracking tools. The tabular format helps keep your expense data organized. They also offer formulas and charts to help you make sense of your spending.

The problem with spreadsheets is that you would need to encode most elements manually, from the layout of your tables to the formulas at play to the data in each cell. In contrast, bookkeeping software can automatically pull records from financial accounts.

Business Bank Accounts

Business bank accounts typically come with built-in expense tracking features. The system records transactions that bring money out of your account, including withdrawals, transfers, debit card purchases, fees, and bill and loan payments.

These records typically include transaction details, such as the transaction date, the amount spent, and the recipient’s account number. However, not all banks provide details on the nature of the transaction. Many will display only the recipient’s account number without providing their name, which can make pinpointing the exact transaction difficult.

Fortunately, you can connect your bank account to bookkeeping software, which will empower you to categorize your transactions for increased specificity.

Business Credit Cards

Getting a business credit card is another way to track expenses. Like business bank accounts, business credit cards automatically record the details of your transactions. You can also sync credit cards to business bookkeeping software to import your transaction history automatically.

You can also issue a type of business credit card to employees. These cards, called corporate liability credit cards, let employees use business money to pay for business expenses. Because you’re not forcing your employees to pay upfront, you don’t have to worry about tracking reimbursements.

There are multiple types of corporate liability credit cards:

• Corporate liability credit card: The typical corporate liability credit card is issued to employees, letting them pay for business expenses using company debt. They let you set spending limits and purchase controls to regulate spending.
• Prepaid cards: If you don’t want to worry about debt or interest, you can load money into prepaid employee cards. On top of giving your employees a finite amount of money for business spending, prepaid cards also let you set spending limits and purchase controls. However, you’ll have to do the extra work of tracking the balances on each card.
• Virtual credit cards: You can use virtual credit cards for increased fraud protection in digital markets. Virtual credit cards are digital versions of credit cards with no physical equivalent. Issuing a virtual credit card generates a unique card number attached to your business bank account. Like other types of corporate liability credit cards, virtual credit cards allow you to monitor expenses and set controls like spending limits and purchase rules.

How To Track Your Small Business Expenses

Tracking small business expenses is a relatively straightforward process. This guide will teach you how to select and use the right tools effectively.

Open a Business Bank Account

As mentioned above, business bank accounts automatically record your payments, withdrawals, transfers, and other transactions. Opening a business bank account will make expenses significantly easier to track. It also helps you divide your personal expenses from your business expenses, which is a requirement for any organization that wants to be treated as an independent entity.

There are multiple types of business bank accounts. When using a bank account for expense tracking, you would usually go for a business checking account, also called a business current account, which allows you to freely move money in and out of your account with minimal restrictions. This is in contrast to business savings accounts, which are designed for storing funds and have more restrictions on the number of transactions you can make per month.

Similarly, you can also choose between brick-and-mortar banks and online banking services. Traditional brick-and-mortar banks offer online banking capabilities but have limited expense-tracking technologies. Meanwhile, online banking services sacrifice physical stores for digital innovation, providing useful tools such as automatic expense tracking and categorization, receipt capture, and sometimes even built-in bookkeeping.

Open Business Credit Cards

If you have a small team, it’s best to open a business credit card for automatic expense tracking. Like with business bank accounts, you can typically sync or upload credit card data into your digital bookkeeping system. This is on top of typical credit card benefits, such as increased spending power, access to rewards, and protection from fraud losses.

If you want increased capacity to control employee business spending, issuing corporate liability credit cards will be helpful. Not only do corporate liability credit cards automatically track expenses, but they also allow you to set spending limits and purchase rules.

As mentioned above, using corporate liability credit cards saves you from the additional burden of tracking reimbursements for employees who are made to pay business expenses upfront.

Prepaid cards are also available for companies with lower debt tolerance. Meanwhile, there are virtual cards for companies reliant on digital purchases.

Business credit cards and prepaid cards typically have looser requirements than corporate liability credit cards since business credit cards involve fewer users and prepaid cards involve no debt.

Meanwhile, because corporate credit cards are meant to be issued to multiple users, companies are stricter about requirements. They might evaluate your eligibility based on your financial standing, type of business, expected spending, and number of card users.

In summary:

• Apply for a business credit card if purchase responsibilities only fall on a few users. Spending limits and purchase controls are less customizable because the cards are meant to be issued to high-authority team members.
• Apply for typical corporate liability credit cards if you want increased access to cash and have a healthy enough financial standing to meet eligibility requirements. You get a high level of control over employee spending limits but are required to pay minimums every month.
• Apply for prepaid cards if you want to issue employee cards but cannot meet corporate liability credit card requirements or have a lower tolerance for debt. Aside from limiting employee spend to pre-loaded card balances, prepaid cards also provide the same level of spending control customizability as corporate liability credit cards.
• Apply for virtual cards if you rely on digital transactions. Like corporate liability credit cards and prepaid cards, they provide high control over employee spending permissions.

Choose A Bookkeeping Software

The most essential tool in your expense-tracking arsenal is your bookkeeping software. It will provide the tools you need for efficient expense tracking, including expense tracking (through connections with bank accounts and credit cards), receipt capture, receipt and invoice management, expense categorization, and reporting.

To choose the best bookkeeping software for small business expense tracking, consider the following:

• Categorization: If your banking or card records provide limited information, you would have to categorize transactions manually. Look for software that lets you set custom rules for automatically categorizing transactions. The ability to bulk-edit categories for multiple records will also help you save time.
• Receipt Capture: Some software allows you to snap photos of receipts and attach them to records. More powerful tools can extract spending information directly from the receipt and automatically match it with the appropriate record.
• Cloud vs. Desktop: It’s good practice to track expenses immediately, so you’ll want on-the-go access to your bookkeeping software. Should you choose a desktop-based bookkeeping software, your records will be locked to a physical location. Meanwhile, cloud-based platforms allow you to edit records on the go, with some even offering mobile apps.

Import Feeds Into Bookkeeping Software

Once you open your business bank account and card, it’s time to import your feeds into your bookkeeping software. Some software offers syncing features that automatically sync your banking and credit card data with your digital records. If this is unavailable, you can typically upload transaction histories in CSV or XLS formats.

Track Receipts and Invoices

Even if your bookkeeping software automatically pulls transactions from your accounts and cards, you still need receipts and invoices as evidence that the transactions actually occurred. The information provided in receipts helps you fill in any details the software might miss, such as the date the transaction occurred, who you transacted with, and the transaction category.

The ability to cross-reference records with official receipts helps you prevent fraud. The documents also prove the legitimacy of your transactions should the CRA ever audit you.

Bookkeeping software typically offers receipt capture features. These let you capture receipts using your phone camera and attach the photo to the appropriate records, streamlining the receipt management process. Keeping your receipts under a digital system makes them easier to organize and locate.

Categorize Expenses

Once you have accurate records and receipts, it’s time to categorize expenses. You can edit entries on bookkeeping software to reflect appropriate categories based on receipt information.

Some bookkeeping software offers automatic expense categorization features. These will automatically sort your transactions for you. You can also set custom rules to automate categorization for future expenses. For example, you can automatically set your payments to gas stations as travel expenses.

Start Your Financial Journey With EpicBooks

Financial responsibilities like expense tracking, bookkeeping, and accounting can be challenging for a small business owner juggling multiple responsibilities. Outsourcing these services to experts can help you elevate your financial management strategies while having time to focus on day-to-day operations.

With EpicBooks, you get premier bookkeeping, accounting, tax preparation, payroll management, budgeting, and financial analysis. Our experts provide personalized financial management solutions that empower growth according to your business goals. Read the EpicBooks services page for more information.