How to Track Your Small Business Expenses Effectively? (6 Easy Steps)

Expenses in any business are never-ending, and hence need to be continuously tracked. Small businesses usually find it hard to monitor, manage and analyze their operating expenses. Businesses being unorganized is the major reason they keep facing financial issues. From mismanaged cash flow to tax errors, not tracking your overheads might directly affect your business’s existence and functionality. 

47% of small business owners said they would need to invest their personal funds if there was no revenue for 2 months. If you run a small business, chances are high that you aren’t aware of numerous factors of finance management. Now that you’re already here, we will discuss everything you need to know about business expenses - tracking, using the right tools and growing your business with a calculative approach. 

Business expenses include the net cost incurred to operate your business. The idea is fairly simple but becomes complicated when not tracked consistently. So the most common expenses like payroll, inventory, office rent and others form your core business expenses. 

It is vital to understand that recalling your expenses once a year (at the time of tax filing) is an unsustainable approach. As you scale up and your business grows, tracking expenses and analyzing cash flow could be even trickier. Why? Dedicating time and efforts to managing business expenses is a tough row to hoe, you got more than enough to do already. If you relate to this issue closely, this guide is for you.

Let’s now dive deep to know more about business expenses, why you need to track them and how can you get started. Stick around for an easy and effective step-by-step process for tracking small business expenses.

What are Business Expenses?

To run your business, certain ordinary and necessary costs need to be incurred. Starting from the rent you pay for the property, salaries you distribute to employees, cost of inventory required for work, insurance for your business, shipping costs, sales commissions, fuel for business vehicles and the list goes on. 

Every business has different expenses based on its scale, industry and requirements. And each operating month, the expenses vary. Although all of the overheads are added up while analyzing your business’s cash flow and financial condition, expenses need to be distributed for efficient financial management. 

Types of Business Expenses 

Expenses involved in business can be divided into four major categories:

  • General Expenses: The cost associated with managing, supervising and fulfilling your customers’ needs comes under general expenses. So, expenditure on wages for employees and sales commissions are also covered within this category..

  • Capital Expenses: Involves the cost of assets that are used to produce goods, offer services and grow a business’s revenue or profits. Depending upon the business, capital expenses cover the capital required to purchase machinery, equipment, real estate, furniture, patent registration, official vehicles and more. 

  • Operating Expenses: Covers the required cost of managing a business – working expenses. Operating expenses include rent, marketing, utilities, vehicles, maintenance and other facilities required to run the business.

  • Inventory Expenses: Expenditures including storage, taxes, insurance and shortages. Inventory can be anything among raw materials, work-in-progress and deliverable products. The value of total inventory should be accounted for at the end of every financial year.

Why Should You Track Expenses?

Tracking your small business expenses might seem like hectic work at the beginning. This is the reason why numerous businesses don’t actively practice it. However, this needs to change. Here are the top reasons why you should track your business expenses:

  1. Being aware of your business status: What kind of cash flow is your business experiencing? Is your revenue in the right place as per the expenses? What’s the value of the stock that you’re holding, and how expensive it is to hold? Tracking your expenses consistently gives you the exact idea of where your money is going and whether is it generating enough value for your business.

  2. Make better and fast financial decisions: Analyzing your expenses and equating the net against business inputs, will help you initiate the path of growth. The stronger your business stands financially, the higher will be your risk appetite and hence, more opportunities for exponential growth.

  3. Be prepared for tax deductions: Tax deduction is a major function of expense tracking. Accurate and continuous tracking of expenses will help you optimize your tax filing by deducting all the relevant expenses and producing a clean audit. More importantly, you will prevent losses for your business.

  4. Keep track of profitability: Your net profitability directly depends on total business expenses. So to find out accurate gains that your business has generated, you need to track the overheads consistently. 

  5. Be transparent with investors: To present a clear picture of the current status of your business, all the business expenses along with revenue, and receipts – should be audited precisely and reports should be delivered.

Top Challenges faced by Small Businesses in Tracking Expenses

Even if you’re a small business, tracking and managing all your expenses can get overwhelming at times. Before we move on the step-by-step journey of tracking small business expenses, let’s take a look at the challenges that need to be solved. 

  • Manual data entry errors: 62% of the surveyed respondents found manual entry to be the biggest challenge in expense management. Any process which is completely reliant on human efforts is prone to errors. When it comes to identifying and fixing these errors, manual methods again become a huge obstacle.

  • Keeping track of receipts and invoices:  Maintaining records of receipts and invoices for all the business expenses annually is another major challenge that small businesses face. Especially for the ones not using digital invoices – tracking and presenting expenditure invoices is a tedious task.

  • Creating financial statements: Accounting is necessary for your business for a number of reasons including tax calculation and business finance analysis. As efficient accounting can only be performed if business expenses are tracked accurately.

  • Handling expenses from multiple accounts: A business needs more than one bank account in many cases. While it might be convenient for processing payments and maintaining cash flow, tracking expenses becomes tricky.

How to Track Your Business Expenses Step By Step?

Now that you know why tracking your small business expenses is immensely critical and after digging out the most common challenges, let’s discuss a sustainable approach to track your expenses. We performed intense research, analyzed the problem statement and talked to various businesses to form this step-by-step strategic process to track your small business expenses:

  1. Start Business Bank Accounts Separately for Expenses

Here are the different types of business bank accounts you should ideally have:

  • Chequing account
  • Credit card account
  • Savings account

If you’re thinking why – as a small business, you need to differentiate between your personal finances and business finances. After all, you don’t want to be found struggling in identifying an expense for medicines or inventory.

Going a bit deeper, payroll is a significant expense which should not be mixed with other 

business expenses for optimal tracking. 

It’s high time you should avoid spending in cash. Cheques are not suitable for smaller purchases and using a personal credit card will only make things more difficult. 

So the best way is to use credit cards linked to a separate account for smaller business expenses that can be related to inventory, electricity bills, internet bills and other small and medium expenditures.

It’s a common practice for small business owners to spend using their personal bank accounts for business purposes. However, as you move forward and grow your business, it’s vital to have different bank accounts for dedicated purposes. It will help you in tracking your expenses better and in a convenient way.

  1. Choose between Cash-based or Accrual accounting

Have you ever heard of accrual accounting? So every business has to choose between cash-based or accrual accounting methods for reporting their income and expenses. 

Accrual accounting is the standard recognized method which follows this principle - Accounts should be recorded when completing the sale, no matter when the payment is made. So for the tax deduction, businesses can deduct in the tax year when the sale was incurred, even if the payment doesn’t come that financial year. Expenses are deducted in the tax year they are incurred.

Cash-based accounting, on the other hand, is a simple approach which says - expenses should be deducted only when they are paid. This method of accounting involved recording transactions when payment has been received. 

Small businesses can choose either one of the accounting methods as compared to bigger enterprises that are bound by accrual-based accounting. 

Cash accounting is incredibly simple for small business expense tracking. However, as you scale up and grow considerably, accrual accounting is the way to go, because of the clear higher-level picture that this type of accounting projects.

  1. Digitize your Invoices, Receipts and Bills with a Scanner

Not all of your expenses would be processed digitally and hence you probably won’t have digital invoices and receipts for business expenses. But you need to track your small business expenses consistently and conveniently. Scanning all your invoices receipts other transaction proofs to store soft copies in different category folders is a productive practice while tracking your business expenses.

It’s totally possible to scan your documents using a mobile phone if a scanner is not available. Digitizing all your expense-related documents would help you stay updated and have a clear, concise record.

  1. Choose a Business Expense Tracker 

Manual accounting and expense tracking halt your and your business’s productivity, hence growth is affected too. You don’t need to spend hours maintaining your books. A cloud-based accounting and bookkeeping solution can assist you comprehensively in automating your expense tracking. Software tools for accounting make it easier, faster and convenient to monitor your sales and expenses.

Additionally, software brings in the powerful ability to categorize your expenses and analyze them by year-on-year comparison. The work required in managing your expenses significantly decreases, and at the same time - the efficiency increases.

  1. Connect Your Bank Account to the Tracker

The most important step in automating your expense management – connecting your bank account to the tracker. You don’t want to manually examine bank statements and put in hours and days in calculating annual expenses. 

Whether it is rent, payroll, vendor services or any other expense – you want accurate as well as consistent recording of transactions. To do that, integrate your accounting software with your bank account and leave expense tracking on auto-pilot.

Running a small business anyways is a tough row to hoe with numerous never-ending chores. Automating your expense tracking is a need rather than a ‘nice-to-have’ aspect. 

  1. Categorize and Analyze your expenses

Small businesses find it hard to grow themselves due to inefficient and partial financial analysis. More often than not, numbers are ignored and financial health is analyzed based on a few assumptions. 

Ideally, business decisions need to be taken based on the accounting reports and hence, expense tracking plays a crucial role.

Moreover, tracking is not enough - you need to categorize your expenses in the form of - fixed, varying, operative and non-operative expenses. For analyzing your business’s financial conditions deeply and making decisions for its long-term sustainability, strategic expense tracking is needed along with brief reports.

How can Fincent Help in Optimizing Expense Tracking for Your Small Business?

Keeping track of your small business expenses with all the hustle and bustle can be a bit too overwhelming at times. Moreover, manual handling and monitoring of your accounts can halt your business’s growth. To help your business run smoothly on the right path, you need to get rid of the mundane tasks and focus on more important decisions. 

Fincent is an intelligent cloud-based solution to handle all your finacial tracking needs. Whether it is tracking your expenses or generating financial statements, all it takes is a click to have a comprehensive overview. The platform lets you connect your bank account, and store all your financial documents. WIth Fincent, accounting has become faster than ever, sIgn up now to get started with hassle-free and efficient finance management.