How to keep track of business expenses in 7 steps

Tracking business expenses is an important aspect of managing any company. If you track expenses accurately and effectively, you produce more useful budgets and make better financial decisions.

However, when things get hectic, especially as a small business, it’s easy to lose your handle on expense tracking. And, when the volume of transactions increases, the chances that your team can make mistakes or fall behind on posting activity also increases.

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

1. Getting a business bank account and credit card
2. Using a business expense tracker app
3. Connecting your financial institutions with your accounting software
4. Choosing between cash or accrual accounting
5. Writing and implementing an expense policy
6. Categorizing expenses and filing receipts
7. Monitoring your business spending at both macro and micro levels

Read on to better understand these steps, explore how business expenses affect your company’s overall financial health, and explore the benefits of automating the process.

What are business expenses?

But first, let’s define what we mean by business expenses exactly. A business expense is any cost you incur in running your company day-to-day. These can range from big expenses like your rent or mortgage to smaller things like incidentals.

Often the best way to improve your bottom line is simply to reduce your expenses. To do that, it helps to understand the types of business expenses you’re likely to incur each month.

Common types of business expenses

Some common categories of business expenses include:

• General and administrative (G&A) expenses: Operating expenses that aren’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): Costs directly related to the production or delivery of your products or services. COGS include direct labor costs, raw materials, and hosting costs associated with delivering software.
• Selling expenses: Costs associated with selling and marketing your business—sales salaries, commissions, and marketing and advertising costs.

How to track business expenses

Tracking business expenses allows you to proactively identify opportunities to reduce spend without impacting the appeal of your product or service to customers. Let’s take a closer look at each of the seven steps for managing your 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 debit or checking account with useful features like online and mobile banking and accounting software integrations.

Adding 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 build 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
• Yield a lower interest rate on card balances

2. Use a business expense tracker

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

Choosing a platform that automatically tracks business expenses and provides real-time reporting is crucial. Some corporate cards come with built-in spend management software that offers features like receipt matching, automatic expense categorization, custom spend controls, and integrations with accounting software.

3. Connect your financial institutions with your accounting software

Once you choose an accounting platform, next, 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. An automated system speeds up the account reconciliation process, helping you close your books more quickly.

4. Choose between cash or accrual accounting

When you set up your accounting software, you 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, ignoring the movement of cash.

It’s important to note that only accrual accounting complies with Generally Accepted Accounting Principles (GAAP). If you plan on raising capital and eventually launching an IPO, use accrual accounting to operate your business.

5. Implement an expense policy

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

Your policy should be tailored to your company’s needs, but there are some key elements you need to include 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 the IRS ever audits your company.

7. Monitor spending at both macro and micro levels

Small business owners often struggle to maintain both a macro (looking at the business as a whole) and micro view (empowering managers to keep tabs on their team's spending habits to reduce maverick spend) of their business spending. You should regularly review your company’s top-line spending, including the breakdown of business expense categories.

Spend management software can help make your transactions easily viewable by employee, vendor, expense category, or department. Use the software's reporting features to see whether you’ve spent more than you budgeted by comparing actual spending to projections.

Benefits of business expense tracking

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. Here are a few of the most meaningful reasons to track expenses:

Gain an accurate view of business performance

When it comes time to look at your monthly P&L statements, it’s equally important to track significant expenses, like advertising, and small-line items, like one-off client lunches. You need a comprehensive view that fully accounts for the entirety of your business spending to get a clear picture of your company’s financial health and, most importantly, to 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.

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, on both a macro level and a micro level.

Stick to your budget

Once you build a budget, the hard part is 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, review business expenses and run a budget variance analysis. If your actual spending exceeds your projections, 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 expenses over $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 prepare your tax returns.

Challenges of tracking business expenses manually

Generally, the smaller a company is, the easier it is to track business expenses. That said, businesses of any size can encounter significant hurdles if they rely on Excel sheets or other manual expense management methods.

These are five challenges to be aware of if you’re attempting to track your expenses manually:

1. Scale: The sheer number of expenses to track can be 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 if you manually process a high volume of transactions.
2. Human error: When processes depend on human input, mistakes inevitably occur. 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 receipt. That’s why modern businesses look for ways to digitize—and automate—their financial activities.
3. Approval delays: As expenses work their way through the approval process, it’s easy for expense reports to be overlooked or forgotten, delaying approval or expense reimbursement
4. Expense fraud: Manual expense 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.
5. 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 environment, you need to be able to monitor spending in real time and adjust accordingly.

Tips for overcoming business tracking challenges

The first step in overcoming these challenges is to acknowledge your level of skill when it comes to finances as a business owner. Is tracking your expenses something you prioritize? Or, do you need some help? Here are a few quick tips that can help you get organized:

• Automate the process: As we’ve said, manual tracking can be a real drag on your resources. Look into expense management tools to help.
• Hire someone to help: If the thought of bringing on a new tool is also stressful, think about hiring a bookkeeper or even just a contract project manager to get it up and running.
• Create an expense report policy: A policy keeps both you and your team honest when it comes to managing your expenses. It is time well-spent in the long-run as your business grows.‍
• Understand which expenses are tax-deductible: If you know which expenses will help you come tax time, it helps your bottom line. Keep an eye not just on spending broadly, how you’re spending, and particularly how those costs can help decrease your tax burden.

The best way to keep track of business expenses

Ramp's expense management software offers a solution for overcoming the pitfalls of manually tracking business expenses. Together with industry-leading corporate cards, Ramp’s modern finance platform provides:

• Automated expense reporting and approvals
• Customizable spend controls
• A handy mobile app for capturing and storing receipts

Ramp automatically tracks and categorizes all your business expenses and can even offer intelligent recommendations for where you can reduce spending to improve cash flow. Check out our interactive demo environment and see why companies that choose Ramp save an average of 5% a year across all spending.