Manual vs Automated Expense Tracking: What’s Better for Your Small Business

According to the US. Chamber of Commerce, almost half of all startups fail within the first five years due to cash flow problems.

If a business’ expenses are exceeding the amount of cash coming in, it strongly suggests that there is a cash flow problem. Small businesses and startups often face this issue and one the main reasons for this is ineffective expense management.

Small businesses need to track their business expenses effectively to ensure enhanced cash flow management.

This can be done by manually tracking every receipt and invoice or by automating the process.

But how can businesses in early stages decide which option is best for their sustained growth?

This is exactly what we’re going to talk about in this blog post – pros and cons of both manual and automated expense tracking and how you can make an informed decision to choose the right option for your business.

Manual Business Expense Tracking

Manually tracking expenses means recording and categorizing business expenses without the use of any system or automated tool. Here’s what the process looks like:

How to manually track business expenses

• Gather receipts and invoices for every business expense.
• Use spreadsheets (like Excel or Google Sheets) to manually record every expense.
• Categorize each expense (e.g., travel, meals, software) manually.
• Reconcile expenses with bank statements periodically, at the end of each week/month.
• Calculate totals and prepare summaries for tax season and reporting.

Pros of manual expense tracking

• Cost-effective: Manually tracking expenses require zero to low costs.
• Customizable: The process gives you full control over recording and categorizing transactions therefore you can easily build and customize a system that works for you.
• Simple & straightforward: If you only have a few monthly expenses, manual expense tracking is easily manageable.

Cons of manual expense tracking

• Time consuming and error-prone: Carefully recording, categorizing, and reconciling expenses manually can take up a lot of time. Moreover, a small oversight like mis categorization or an omitted transaction can lead to inaccurate financial reporting.
• Hard to scale: While it’s convenient to manually track expenses during the initial days of your business, the process will get more complicated and time consuming as you scale.
• Stressful during tax season: Manually keeping track of all expenses-related documents can get overwhelming during the tax season due to looming deadlines.

Automated Business Expense Tracking

Automated expense tracking refers to the use of automated software and tools to record, track, and reconcile business expenses. The process of automatically tracking expenses looks like this:

How to automatically track business expenses

• Connect your bank/credit card accounts to a bookkeeping platform (like Fincent).
• The platform automatically syncs transactions and there’s no need for manual data entry.
• Software auto-categorizes expenses based on rules or past behaviour.
• Dashboards and reports give you a real-time overview of where your money is going.
• Some tools also allow you to:
• Upload receipts
• Create rules for recurring expenses
• Export reports for taxes or accounting
• Flag unusual or duplicate expenses

Also read How to Track & Manage Your Small Business Expenses to understand the process in detail.

Pros of automated expense tracking

• Saves time and improves accuracy: With automated expense tracking, there’s no need for you to spend time on spreadsheets. The platforms automatically import transaction details from linked accounts, categorizes them, and reconciles them on time. This process also reduces the chances of mis categorizing or omitting expenses, which, in turn, improves the accuracy of financial statements.
• Real-time insights and visibility: Automated bookkeeping platforms give you instant access to your financial data, cash flow, and spending trends, allowing you make better financial decisions.
• Highly scalable: Automated business expense tracking is highly scalable and can easily handles hundreds of transactions effortlessly to suit the needs of your expanding business.
• Improved tax preparation & compliance: AI-powered bookkeeping platforms efficiently organize and categorize your transactions to simplify tax filing and enhance audit-readiness.

Cons of automated expense tracking

• Costly: While there’s almost no cost involved with manual expense tracking, onboarding an automated bookkeeping platform or expense management system will come at a cost.
• Involves a learning curve: Irrespective of the type of the platform you use for managing your business expenses, there may be a learning curve to get comfortable with a new tool.
• Data privacy concerns: If your bookkeeping platform uses a third-party tool to host information, there might be concerns regarding the security of sensitive financial information.

Manual vs Automated Business Expense Tracking

Now that we’ve understood the benefits and advantages of manual and automated processes of expense tracking, you might have a better idea of what your business needs.

Here’s a comparison chart to help you further:

Criteria	Manual Expense Tracking	Automated Expense Tracking
Time required	Manual data entry and reconciliation is time taking.	AI-powered platforms automatically sync and reconcile transactions with minimal human intervention.
Accuracy	Prone to human-errors.	Automation reduces chances of errors significantly.
Real-time visibility	No real-time insights are available before reconciliation.	Automated platforms provide real-time insights and show spending trends instantly.
Cost	Highly cost-effective.	Subscription or service-based cost involved.
Scalability	Not very scalable once the number of transactions increase.	Highly scalable, platforms can handle high volume of transactions easily.

How to Know What’s Right for Your Business

At this point, we have a clear idea of how manual and automated expense tracking processes work. Now you need to decide which option suits your business requirements better. While making the decision, you should consider the following questions:

• How many transactions does my business process monthly?
  • If you only have a handful of monthly expenses, manual process might be a better option. But high volume of transactions can be handled by automation more quickly.
• How much time am I (or my team) spending on expense tracking? Is this taking time away from higher-value work?
• Do I feel confident in my ability to track and categorize expenses accurately?
  • Manual methods require attention to detail while automation reduces the chance of human error.
• Do I need real-time visibility into my business spending?
  • Manual process will give you delayed insights.
• Am I often behind on bookkeeping or struggling to stay organized?
  • Automation helps eliminate backlog and catchup stress and allows for stress-free tax filing.
• Is my business growing—and will this system still work 6–12 months from now?
  • Manual processes break down as you scale.
• Do I want to save money upfront or invest in long-term efficiency?
  • Manual expense tracking doesn’t require any investment, but automation enhances productivity and gives you peace of mind.

Why are Small Businesses Choosing to Automate Expense Tracking?

Even though manual business expense management gives you more flexibility and control over your operations, startups and small businesses are increasingly adopting automated financial platforms. This is due to the:

• Rising complexity of financial operations and data overload.
• Need to focus on other important business aspects.
• Availability of affordable bookkeeping platforms that take care of all accounting needs including business expense tracking.
• Need for real-time financial insights to take fast and informed strategic and financial decisions.

How Fincent Can Help

Fincent is a comprehensive bookkeeping platform designed for small businesses and startups. We take care of all your bookkeeping and accounting needs including transaction recording, categorization, expense tracking, tax filing, and financial reporting.

When it comes specifically to business expense tracking, Fincent can take the task entirely off your hands. Our AI-powered transaction categorization system efficiently tracks and categorizes all expenses giving you a clear snapshot of how much you are spending. This helps you effectively manage your cash flow and invest in growth opportunities.