Expense tracking for small businesses
Quick insights
- Expense reporting is the process of documenting a business’s expenses.
- This process allows businesses to track spending and set budgets.
- Organized expense reporting can help businesses organize tax-deductible expenses to prepare for tax season.
If you’re a small business owner, chances are you’re making purchases on behalf of your business. It’s generally considered best practice 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 some benefits of tracking business expenses, steps for creating an expense report and guidelines to consider.
Why small businesses should track expenses
There are several reasons why it can be 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 may help them identify 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. Organized expense reporting allows financial stakeholders to view detailed reports of individual employee spending.
Ways to manage expenses
Follow these tips to help track work expenses:
Documenting expenses through expense reports
Tracking expenses manually can be time-consuming and prone to human error. Here are a few tips that could help simplify creating expense reports:
- Using a template: Downloading an expense tracking template from a reputable expense management company may save you time. As you grow, you might consider investing in this type of software to help automate the process.
- Adding line items: Itemization helps to organize expense reports. You may want to instruct employees to include details for each line item, including a brief description of the purchase, date of purchase, total purchase amount and expense category.
- Categorizing 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 common categories.
- Attaching receipts: Attaching receipts associated with business expenses can make it easier to prepare for tax season.
Creating company expense report policies
The process doesn’t end after you create an expense report—the next step is deciding who approves them. This may be a business owner or key financial stakeholders. Instructing employees to send completed expense reports to this person for approval/reimbursement can help keep the process organized.
It may also be a good idea to train employees on the expense reporting process to reduce the chance of small human errors.
Regularly reviewing and analyzing expenses
Reviewing expenses on a monthly basis may help you prepare in advance for taxes as well as analyze expenses and pivot your budget if needed. This allows you to check whether the company is staying on budget, or where there might be 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. Another option might be a business credit card that allows your business to earn rewards on these types of purchases.
Setting 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 something to consider.
Many business credit cards allow the primary cardmember to set spending limits for employees through employee cards. This way, employees won’t be able to spend more after they’ve hit the limit.
Consulting accounting or tax professionals
If you’re a new business owner—or even a seasoned entrepreneur handling a complex expense management situation—it may help to seek professional advice. Many business owners choose to hire tax professionals to help identify any deductions or avoid making mistakes when filing taxes.
Tips for tracking business expenses
- Keeping business and personal expenses separate: This might make it easier to monitor business-related expenses, and potentially make filing for taxes less confusing.
- Applying for a business credit card: In addition to helping businesses track expenses, dedicated business credit cards may allow cardmembers to earn rewards on regular purchases.
- Investing 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.
- Auditing 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.
- Staying updated on tax regulations and deductions: Refer to the IRS Tax Guide for Small BusinessesOpens overlay for up-to-date tax information.
In summary
Tracking business expenses can be a useful way to monitor overall spending and prepare for taxes—even for small businesses. A good first step might be to begin documenting all business expenses via expense reports. As your business grows, you may want to consider software to help automate processes and propel your business forward.
