As a business owner, do you handle your own finances without the help of a bookkeeper or an accountant?
If you do, you’ve likely had the experience of bookkeeping tasks—like recording business expenses—falling to the wayside for a multitude of reasons (e.g. you’ve been really busy or the idea of bookkeeping summons a deep dread, so you put it off). And when that happens, your records become disorganized and difficult to analyze. Eventually, those scattered transactions hurt your ability to prep for tax time, budget and plan, track profits, and manage your cash flow.
Breaking that cycle means learning how to track and organize your expenses so you can take advantage of tax deductions and make truly informed financial decisions not just for the health of your business but also for your peace of mind.
What business expenses should you track?
Simply put: your expenses are the costs of doing business.
What’s valuable about every expense is that it comes with data. When you collect and organize this data, you’re more equipped to answer questions about your finances and make decisions now and in the future. To simplify your bookkeeping, you can limit tracking to five items and add more transaction types as you get into a routine.
Some examples of business expenses include:
- Merchandise, inventory, product distribution
- Advertising and marketing
- Vehicles and fuel
- Office equipment
Depending on your industry and what you do, you also may encounter unconventional business expenses like product or service trades. Trades involve the exchange of goods or work that’s worth the fair market value of the payments you’d otherwise provide.
For example, if you were a local sign maker, and you paid a mechanic to detail your work vehicle by providing new, custom signage instead of a cash payment, that’s a real business expense you need to track. To record it, you’d research the fair market value of the item or service you gave in exchange and use that amount for your records.
If you find yourself in a product or service trade situation, mark them as you would for one of your common expenses using the fair market value price but make a note to revisit it later when you’re reviewing your other expenses.
Why should you track business expenses?
As mentioned before, the number one reason to learn how to keep track of business expenses is to look after the financial health of your business. Once you have that perspective, you’ll make smarter decisions that will help you reach your business goals.
The second reason to record every outgoing dollar is so you owe the IRS less come tax time (yay!). Needlessly overpaying on taxes is just throwing money away.
Let’s look at both reasons more closely.
Identify cost savings, plan spending, and improve cash flow
When you track business expenses, you’ll have a continual benchmark for regular expenditures.
Let’s say you’re a retailer that overhears another store owner mention what he pays in credit card processing fees. If you’ve been tracking your business expenses, then you’d know roughly what you’ve been spending in payment processing fees, and quickly decide whether the other business owner is getting a better rate. From here, you can shop around, find a better deal, and switch, saving yourself hundreds of dollars.
Another way you’ll benefit is by using your past spending patterns to plan future spending. A 2021 Clutch survey found that most small businesses that create a budget successfully stick to that budget.
Finally, tracking business expenses means you’ll know more than just what you spent — you’ll also see when you spent it, which helps you manage your cash flow.
For example, you’ll know when (in each month or sales cycle) transactions tend to occur so you can plan payroll or large purchases at the same time next cycle.
In short, tracking business expenses gives you financial visibility into where your money is going. From there, you can make more informed decisions.
Take advantage of tax deductions
Tracking business expenses lets you deduct certain items to lower your taxable income. What does this mean?
In a nutshell, the IRS gets a percentage of what your business makes. The less money your business makes in a year, the less you owe in taxes, and that means more money in your pocket.
The number one tax strategy to report less income is not to stop selling your products and services. The best way to lower your taxable income is to show the government how much you spent to earn that money.
Deducting business expenses from your income lowers the amount you owe the IRS. It may even move your business into a more favorable tax bracket (which gives you a whole new—and better—tax rate).
Now that you know why you need to track expenses, you’ll be more motivated to get the job done—regularly and completely.
Now let’s outline how to make it happen.
Set up systems to track business expenses
Start by structuring your daily to-do list to include business expense tracking. Here’s how.
Choose your accounting type
The way you’ll track expenses depends on which accounting method you use.
Cash-basis accounting is the practice of recording expenses when cash actually leaves your business, not when the expense is incurred. Imagine you hire a freelance graphic designer to create a new logo for you. She agrees to deliver the work in a week, and you agree to pay on that day as well. If you’re using cash-basis accounting, then your business expense will “occur” on the date that work was delivered and the cash left your bank account.
The benefit here is that the daily work of jotting down those expenditures is super simple. If you’re just starting out, this may be a good system until you grow into accrual-basis accounting.
For all its benefits, cash-basis accounting also has its drawbacks. It doesn’t scale well, which means you’ll encounter complex transactions that won’t fit into your simple system. It also gives you an incomplete picture of what your business spent in a given period. And remember, getting the full picture of your financial health is a big reason you’re tracking expenses in the first place.
So when you’re trying to decide, remember these pros and cons and apply them to your business’s stage of growth. Early on in your growth, cash-basis may be better for you. If your venture grows in transaction size but not volume, then cash-basis accounting may continue to work for you. But if you begin logging many business transactions per week, consider accrual-basis accounting.
If you choose accrual-basis accounting, you’ll log transactions at the time they’re decided, not when payment is made.
Think back to the graphic designer example. With accrual accounting, you’d record the expense the day you signed her freelance contract for the new logo. Even though no money has changed hands yet, your business still logs that transaction at the moment of the agreement.
The accrual-basis method of recording expenses benefits you by providing a more accurate history of when money left your business. The trick is that this benefit unfolds over time.
The main drawback of this method is the extra time and brainpower needed as you learn the ropes. The other (arguably less painful) drawback to accrual accounting is the taxes you’ll pay on money you have not yet received. Come tax time, you’ll pay taxes on money that customers still owe your business.
For more help deciding between cash basis or accrual basis, talk with a certified public accountant (CPA). If you prefer to do your own research first, you can explore discussion forums on sites like Reddit to learn firsthand from other business owners about how they made the decision.
Open a separate bank account for your business
The next step in starting to keep track of business expenses is to establish a banking relationship and open a business-specific account.
Yes, it’s tempting to start your business with your personal account. And doing so is not uncommon. A Square survey found that only 63% of small business owners say they opened a business checking account upon launch. However, even if you do start with a personal portion of money, opening a business bank account is the only viable way to grow and manage your professional funds.
To be clear, you can use personal funds for your business. But it should be deposited into your business checking account first to ensure you have a clear, uncomplicated record of your money’s new purpose.
Once you open a business banking account, tracking business expenses is significantly easier.To find and set up the best business account for you, examine banking products for fees, limits, and perks that apply to your situation. For example, if your business has a high volume of small transactions, then you may benefit from an account with no transaction limit. Or, if you tend to transfer funds a lot, look for a business bank account with low (or no) transfer fees.
Get a business credit card
Once you’ve set up a business banking account, start shopping around for a business credit card that you’ll only use for business purchases. This will further separate your personal and business finances. It’s too easy to mingle consumer credit with business credit, and when you do, you could be fined or lose your liability protection.
Still, 75–80% of small businesses are self-funded, which can further tangle personal and business finances. If that’s you right now, you’re not alone—and a business credit card is a great way to start treating your individual finances and your business as separate entities.
When choosing a business credit card, consider these three things:
- Rewards. Choose a card that gives you rewards you’ll actually use. If you never travel, for example, don’t get a card with airline miles or hotel points—go for cash back or other rewards.
- Your ongoing financial practices. Planning a big purchase? Look for a business credit card with a 0% APR intro offer. Intend to pay off your balance each month? Skip the 0% APR in favor of a signup bonus that will help with a more immediate expense.
- Credit limit. A lower limit may not be a drawback if it helps you learn to stick with a budget. Lean times may mean you are attracted to a card with zero annual fees and/or cash back.
Once you’ve chosen a card, start planning how to make the transition from your personal funds to a business account.
One way to do this is to brainstorm scenarios where you’d accidentally pay with the wrong method and take steps to prevent those situations to avoid headache-inducing administrative messes.
Imagine, for example, you’re going to a farmer’s market on the weekend where you wouldn’t usually bring a business card. But if you’ve planned ahead, you can go to the market prepared to pick up a few items by bringing your business credit card. That way, when you notice a local crafter who arranges hanging flower baskets, you can grab a couple for your own storefront and pay with the correct card.
Adopt a cloud accounting tool to keep expenses in one place
Technology and automation can save every small business valuable time that would otherwise be spent on growing your business. Today’s cloud accounting tools enable collaboration between you, your team members, and if applicable, your accountant. They also replace emailed spreadsheets to save you valuable time that would otherwise be spent on growing your business.
But the main reason you need good accounting software is to streamline your day-to-day expense recording. The right cloud accounting tool saves you time by automating tedious, repetitive tasks like data entry; separating and sorting information ; transaction matching; and categorization.
As you consider tools, avoid the trap of grabbing one just because it has clever online ads or an extensive suite of features. For now, you don’t need an accountant’s tools. You simply need a little automation to quickly and reliably record business expenses.
Use a receipt scanner to digitize all receipts
A mobile bookkeeping app like Neat is the perfect solution at this phase. Today’s technology automates data input and organization.
Erase the mental image you have of yesteryear’s “receipt scanner.” If you choose the right business expense recording tool, then the only hardware involved is your smartphone, which you likely already use for everything else.
Best practices for tracking business expenses
Now that you’re set up to track business expenses, optimize your processes to become even more efficient. Doing so both saves you time in the long run and further reduces your risk of being audited or getting passed over for a business loan.
If you have software, connect it to your bank account
You have a new business bank account.
You have a new business credit card to make purchases.
You have a new tool to record those expenses.
Now, connect your new business bank account to your software to eliminate the extra work of verifying the transactions in your account by going through your own records line by line. The practice is called “reconciliation.”
The phrase may sound intimidating, but reconciling transactions is simply the task of matching your own records to your bank’s records. It’s the best way to optimize your new bookkeeping practices.
Now that financial institutions can automatically communicate with small business accounting tools like the one you implemented in the previous step, accounting will happen while you’re conducting sales calls, attending industry conferences, enjoying a team-building activity, or reclaiming your personal time.
If you’ve accidentally chosen a small business bookkeeping solution that doesn’t have the ability to link to your bank account, switch tools now. It’s better to upgrade today than to wait until you’re spending needless hours going line by line to verify your accounts yourself.
Your new tool should automatically compare balances, flag mismatches, and pair transactions.
Use your new tool to record all expenses immediately
Small business owners are often trying to balance family, grow a business (many times while being employed full time), and these days, navigating the challenges of changing rules during a pandemic.
Amid all this, the simplest tasks are the ones that tend to fall through the cracks. So this best practice—logging all business expenses immediately—is easy to forget.
Avoid that pitfall. Here’s how:
- Cultivate resilience. Remember what happens when you fall behind: You’ll forget the context that helps explain and organize each transaction. This means, for example, that a transaction that needs to be split into two categories may incorrectly be lumped into one.
- Practice habit stacking. Commit to logging expenses every time you do another routine action that’s simple. For example, every time you get in the car, make a pot of coffee, or every day after finishing lunch. Author James Clear calls this habit stacking.
- Get human accountability. Your new app will help you remember to input receipts immediately. But if needed, swap encouragement with a friend who wants help developing a new habit herself. It doesn’t need to be a fellow business owner; it could be a spouse or friend who wants to eat healthily or read more books. Check in daily to keep the momentum going.
Regularly review and analyze expenses
Routinely read through where your money has gone. Compare your monthly spending against short- and long-term goals: are you expending more than you wanted or planned? Are you making purchases that align with your business’s values?
Remember the wealth of information contained within each transaction when you properly record it. Use this transaction data to analyze trends and opportunities.
For example, one trend could be when you realize you’re overpaying 1099 helpers whose work can be done more efficiently. An example of an opportunity could be when it’s time to renegotiate a vendor contract/agreement or terms. You could get a better rate just by comparing your payment history with standard market rates.
Keeping track of business expenses is easier said than done
Knowing how to keep track of your business expenses is not enough. You need to implement what you know. Bookkeeping is easy to put off because the work is tedious, repetitive, and time consuming. But if you fail to capture, organize, and track your expenses, you’ll:
- Miss out on valuable tax deductions
- Operate your business without visibility into your finances
- Struggle to navigate opportunities and grow
Bad accounting can sink a business. The simple act of tracking business expenses can save you those headaches.
Want to make expense tracking easy? Sign up for a free 14-day trial of Neat today.