Expense tracking for small businesses
Quick insights
- Expense reporting is the process of documenting a business’ expenses.
- This process allows businesses to track spending and set budgets.
- Proper expense reporting can help businesses organize tax-deductible expenses to prepare for tax season.
Whether you’re a small business owner or a solopreneur, chances are you’re making purchases on behalf of your business. It’s important to track those expenses even if you aren’t a part of a larger organization. For example, keeping an eye on monthly expenses helps business owners identify spending trends or cut redundant costs. A common way to track business purchases is through expense reports, where employees can attach receipts and describe specific expenses. Many businesses opt for expense management software to help automate this process. Read on to learn the benefits of tracking business expenses, how to create an expense report and best practices to consider.
Why small businesses should track expenses
There are several reasons why it’s helpful for small businesses to keep tabs on expenses, including:
- Tax purposes: Businesses need evidence (typically receipts) to show that their tax-deductible expenses were in fact business expenses. Properly tracking expenses helps business owners stay organized in preparation to file taxes—and ensure they’re maximizing their available tax deductions.
- Budgeting: If business owners don’t formally track their spending, they’ll have less data to refer to when budgeting. Expense reports break up purchases by category, which helps financial stakeholders identify areas in which the business spends the most.
- Cost cutting: If a business employs at least a few people, there are chances that there could be redundant spending. For example, two employees may be paying for the same software when they only need one account.
- Employee reimbursement: Many businesses require employees to make out-of-pocket purchases and send an expense report to get reimbursed. Proper expense reporting allows financial stakeholders to view detailed reports of individual employee spending.
How to manage expenses
Follow these steps to ensure you’re properly tracking your work expenses:
Document expenses through expense reports
It can be tricky to manage business expenses after you begin hiring employees. Here are a few quick steps to creating a simple expense report:
- Use a template: Download a free Excel template from a reputable expense management company like QuickBooks. As you grow, consider investing in this type of software to help automate the process.
- Add line items: Expense reports should be itemized. Make sure that employees include expense details for each line item. Typically, this will include a brief description of the purchase, date of purchase, total purchase amount and expense category.
- Categorize purchases: Categorizing each expense can help business owners create an accurate budget and prepare for tax season. Refer to the IRS’ guide to business expense resourcesOpens overlay to learn more about important categories.
- Attach receipts: You’ll need receipts for business expenses come tax season, so ensure that expense reports have all necessary receipts before approving them.
Create company expense report policies
It’s not enough to create an expense report—the next step is deciding who approves them. This may be a business owner or key financial stakeholders. Instruct employees to send completed expense reports to this person for approval/reimbursement.
It may also be a good idea to train employees on the expense reporting process to reduce the chance of small human errors.
Regularly review and analyze expenses
Don’t wait until tax season to monitor your spending; ideally review expenses each month. It’s much easier to do this when you require employees to submit expense reports for all business purchases.
Check to see if the company is staying on budget, or where there are opportunities for improvement. This can also be a good time to check for cost-saving opportunities.
For example, if your employees travel frequently, you may want to research more budget-friendly hotels and flights. Or consider a business credit card that allows your business to earn rewards on these types of purchases.
Set employee spending limits
When you work with one or two other employees, you may not yet see a need to set spending limits for specific expense categories. As your business grows, it may be wise to do so.
Many business credit cards allow the primary cardmember to set spending limits for employees. This way, employees won’t be able to spend any more after they’ve hit the limit.
If you’re considering a small business credit card, the Ink Suite of business cards lets you set spending limits and provides employee credit cards at no additional cost.
Consult accounting or tax professionals
If you’re a new business owner—or even a seasoned entrepreneur handling a complex expense management situation—it may be wise to seek professional advice. Many business owners choose to hire tax professionals to ensure they don’t miss out on any deductions or make mistakes when filing taxes.
Best practices for tracking business expenses
- Keep business and personal expenses separate: This will make it easier to monitor business-related expenses, and potentially make filing for taxes less confusing.
- Apply for a business credit card: In addition to helping businesses track expenses, dedicated business credit cards allow cardmembers to earn rewards on regular purchases. Explore the Chase Ink credit card reward categories for additional details.
- Invest in expense management software: As you grow, it may make sense to purchase accounting or expense management software to automate this process. These applications usually save photos of receipts, meaning you’re less likely to lose them come tax season.
- Audit your bank statements: It may be helpful to cross-reference your bank statements and expense reports each month. This allows you to audit them for any errors.
- Stay updated on tax regulations and deductions: There are plenty of rules when it comes to tax deductible business expenses. Luckily the IRS has a Tax Guide for Small BusinessesOpens overlay to help explain how the process works and update business owners with any new details.
In summary
Tracking business expenses is a useful way to monitor overall spending and prepare for taxes—even for small business. A good first step is to begin documenting all business expenses via expense reports. As your business grows, consider software to help automate the process and save time for tasks that can increase revenue and propel your business forward.
