How to keep track of business expenses in 7 easy steps

Keeping track of business expenses is an important part of running any company—and yet it’s easy to lose a handle on when things get hectic.

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In this article, we’ll explain how to keep track of your business expenses in seven steps, including:

1. Getting a business bank account and credit card
2. Using business expense tracking software
3. Connecting your financial institutions and accounting software
4. Choosing between a cash or accrual accounting system
5. Implementing an expense policy
6. Categorizing expenses and filing receipts
7. Monitoring your business spending at a macro and micro level

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Read on as we break down each of these steps, dive deeper into how business expenses affect your company’s overall financial health, and give you some options for automating the process. 

How to track business expenses

1. Get a business bank account and credit card

Keeping your business and personal expenses separate makes bookkeeping and tax filing much easier. For that reason, it’s important to open a dedicated business bank account. Be sure to choose a business checking or debit account that provides useful features such as online access and the ability to integrate with accounting software.

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Getting a business credit card or corporate card can further maintain a proper division between your personal and business expenses. What’s more, using your business credit card responsibly can help you start building your business credit score. A strong business credit score can make your business more attractive to investors, give you access to a higher credit limit, and a lower interest rate on card balances.

2. Use business expense tracking software

Manual bookkeeping processes are time-consuming and labor-intensive—not to mention error-prone. Accounting and spend management software eliminates these challenges, providing a more accurate and efficient way to keep track of business expenses.

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Choosing a platform that automates expense tracking for you and provides real-time reporting is crucial. Some corporate cards come with built-in spend management software that offers functionalities like receipt matching, automatic expense categorization, custom spending controls, and integrations with accounting software.

3. Connect your financial institutions and accounting software

Once you’ve chosen an accounting platform, you’ll want to connect it to your financial institutions. Modern solutions can automatically import your banking and card transactions for real-time visibility. By automating the process, you can easily compare accounting transactions with bank and credit card data.

4. Choose between a cash or accrual accounting system

When you set up your accounting software, you’ll want to choose between a cash-basis or accrual accounting system. In cash accounting, revenue is recorded when cash is received, and expenses are posted when cash is paid. Accrual accounting records revenue when earned and expenses when incurred. The accrual method ignores the movement of cash.

5. Implement an expense policy

A clear and comprehensive expense policy is crucial for expense tracking, especially if your employees processes a large number of expense transactions. Your expense policy helps minimize the risk of overspending and simplifies your bookkeeping and expense reimbursement processes.

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Your policy should be tailored to your company’s needs, but there are some key elements you should have regardless of size or industry. If you’re starting from scratch, an expense policy template can come in handy.

6. Categorize expenses and file receipts

The IRS mandates that you keep all hard-copy receipts and other financial records, such as bank statements, for at least three years. If you use a corporate card like Ramp that comes with expense management software, you can upload and store electronic receipts and categorize expenses in a way that works for both you and any third parties. This is especially useful if your company is audited by the IRS". By naming the IRS, it avoids confusion with a CPA firm's financial statement audit.

7. Monitor spending at a macro and micro level

It’s important to maintain both a macro and micro view of your company’s spending. You should regularly review your company’s top-line spending, including the breakdown of business expense categories.

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Spend management software can help by making your transactions easily viewable by employee, merchant, expense category, or department. Use the software's expense reports to compare actual spending to the budget, or if you've spent more than budgeted.

Why is it important to track and control business expenses?‍

Consistent and accurate business expense tracking can help you better manage your current financial resources and plan for the future. But the benefits extend beyond that. 

Gain an accurate view of business performance

When it comes time to look at monthly P&L statements, it’s important that you keep track of large expenses like contractor payments and marketing ad budget as well as small line items like one-off client lunches. You need a comprehensive view that fully accounts for the entirety of your spend so you can get a clear picture of your company’s financial health and adjust as needed.

Reveal spending issues

If you don’t know where your money is going each month, you won’t be able to eliminate wasteful spending that negatively impacts your company’s profitability. Daily and monthly expense tracking allows you to find such trends or outlying costs.

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Managers need to know the total cost of a product. A profit margin is added to the total cost to determine the sale price. When expenses are tracked accurately, product pricing is more precise.

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To get a clear picture of your business finances, you must be able to catch the little costs that add up and decide whether larger expenses are justifiable. This works on both a macro level (looking at the business as a whole) as well as a micro level (empowering managers to keep tabs on their team's operating budget and spend habits to reduce maverick spend).

‍Adhere to your budget

Once you’ve built a budget, the hard part is actually sticking to it. Business expense tracking is one of the best ways to ensure your spending habits align with your established plan. At the end of each month, you can review business expenses and compare your actual spend to budgetd spend. If actual spending is higher than budgeted, you can identify where to cut back. 

Prepare for tax season

Tracking your business expenses can make your company better prepared for tax time. The IRS requires you to keep receipts for any business expense greater than $75. Ideally, your tracking system should be able to log receipts on your behalf so you can easily see which of your payables and receivables are tax-deductible when it’s time to fill out your tax returns.

Challenges of managing business expenses manually

Generally, the smaller a company is, the easier it is to track business expenses. With that said, businesses of any size can encounter significant hurdles if they rely on managing expenses manually.

Scale

The magnitude of operational expenses to track can seem overwhelming. In particular, managing tail spend can be difficult since it typically makes up 80% of business transactions but just 20% of costs. Expense management is far more difficult when the business processes a large number of transactions using a manual process.

Human error

When processes are dependent on humans, there will inevitably be mistakes. Manual processes are harder to optimize since human error will always be present to some degree, whether it’s a miscategorized expense or a lost employee receipt. That’s why so many businesses are looking for the best ways to digitize—and automate—their financial activities.

Approval delays

As a financial monitoring and approval task passes along to the next step in the accountability chain, an expense report might go overlooked or be forgotten, delaying the process of approval or expense reimbursement.

Expense fraud

Manual expense management and tracking makes it difficult to review and verify every business expense for accuracy. This exposes your business to expense report fraud—yet another argument for automating the business expense tracking process. 

Outdated financials

Expense audits are usually limited to end-of-month financial reports. If you don't analyze expenses until month-end, you may be relying on out-of-date information to make financial decisions. In a competitive business environment, you need to be able to monitor your spending in real time and adjust accordingly.

Common types of business expenses

Improving your business’s bottom line is often as simple as reducing expenses. Tracking business expenses allows you to proactively identify opportunities to reduce spend without impacting the appeal of your product or service to customers. To do that, it helps to understand the types of business expenses you’re likely to incur each month.

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Some common types of business expenses include:

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• General and administrative (G&A) expenses: These include any operating expense that isn’t related to the production or sale of goods and services. Rent, utilities, office supplies, and insurance are all common G&A expenses.
• Cost of goods sold (COGS): Any costs that are directly related to the production or delivery of your products or services would fall into the COGS bucket. COGS include direct labor costs, raw materials, and hosting costs associated with delivering software.
• Selling expenses: Costs associated with selling and marketing your business would be considered selling expenses. They include expenses like sales salaries and commissions and marketing and advertising costs.

How to track business expenses for free

If you’re an entrepreneur or self-employed, you may not have the budget to start using spend management or accounting software. Luckily, you can find a number of free options to track your small business expenses.

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Business expense tracker apps like Ramp, Expensify, and Zoho Expense all offer free plans that let you to track business expenses. These apps provide features such as receipt scanning functionality, personalized reports, and multicurrency support to help you accurately monitor expenses and manage your financial situation. As mobile apps, they make it easy to track expenses on the go.

Track business expenses with Ramp’s spend management software

Ramp's expense management software offers a solution to the pitfalls of manually tracking business expenses. Our digital system (paired with corporate cards) ​​includes features like automated expense requests and approvals, customizable spend controls at the card, employee, and merchant level, and a handy mobile app for capturing and storing receipts. 

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Ramp automates business expense tracking and reporting, and can even offer intelligent recommendations for where you can reduce spend to improve your bottom line. Businesses that use Ramp can look forward to saving an average of 5% per year.