Running a business means keeping a close eye on your money, and that includes tracking expenses. Keeping accurate records of what you spend throughout the year not only keeps your finances organized but also makes tax time less stressful and helps you maximize tax deductions for the year. To help, we’ll walk you through what to track, the best tools to use, and how to build a system that works for your business.
In this article, you’ll learn:
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Understand expense categories to keep your records organized. Which types of expenses to track, including fixed costs, variable costs, additional expenses, and one-time or irregular purchases.
- The different methods and tools for tracking expenses, from spreadsheets to automated software like QuickBooks, Expensify, and FreshBooks.
- Why keeping a separate business bank account and separating personal and business expenses is essential for accurate bookkeeping.
- Best practices for organizing and storing receipts to simplify record-keeping and audits.
- How to stay consistent with expense tracking through daily, weekly, monthly, quarterly, and year-end reviews.
Why Tracking Business Expenses Throughout the Year Is Important
While tracking your SMB’s expenses throughout the year is an essential part of maintaining financial records for the IRS, it can also significantly impact how you run your business and its subsequent success. Some of the most notable benefits of regular expense tracking include the following:
Makes Tax Time Less Stressful: Reviewing your expenses throughout the year gives you time to prepare for filing in April. This can result in more detailed expense records, a lower taxable income, and less time-consuming chaos as the tax deadline approaches.
Helps Maximize Deductions and Avoid Errors: Keeping track of expenses helps ensure that you don’t miss out on deductions throughout the year. It also reduces the chances of triggering an IRS audit.
Improves Cash Flow Management: Expense reporting is part of good financial planning, which can help you create a budget and improve overall cash flow.
Although the idea of managing your business expenses every week can sound unappealing, small actions add up. Plus, there are several automation tools that help you simplify your business finances and make things easier to track throughout the year.
7 Tips for Small Business Expense Tracking
Small businesses should have a system in place to save time and keep the books accurate. While this may look different for everyone, there are a few general tips that every business should consider. Here are a few best practices to help manage expenses and maximize business income.
1. Know Which Business Expense Categories to Track
First, you need to know what to track. Several different business expenses need to be part of financial management. Some of the most important things to track include the following:
Fixed Costs
These are predictable, recurring expenses that stay the same month after month. They form the foundation of your operating budget.
Rent or mortgage for office or storefront space
Utilities such as the internet, phone, and electricity
Insurance premiums (health, liability, or property)
Salaries for full-time staff
Software subscriptions that renew at a fixed rate
Variable Costs
These expenses fluctuate depending on your business activity. Tracking them helps you identify spending patterns and areas where you might cut back.
Inventory or raw materials that vary based on demand
Shipping and delivery costs
Marketing and advertising spend (online ads, social media campaigns)
Freelancer or contractor fees
Commission-based wages
Additional Expenses
These aren’t always monthly, but they’re often necessary for running your business smoothly. All of these should be tracked, with receipts.
Business travel expenses (flights, hotels, meals during business trips)
Professional services (accountants, consultants, legal fees)
Continuing education (workshops, training, certifications)
Office supplies and equipment
Maintenance and repairs for equipment or property
One-Time or Irregular Expenses
These don’t occur often, but when they do, they can be significant. If you’re going to enter an irregular purchase into an expense report, just make sure that you have invoices, receipts, and any supporting documentation to avoid getting flagged for expense fraud.
Large equipment purchases (computers, vehicles, machinery)
Office renovations or expansions
Annual business licenses or permits
Special events (conferences, product launches, trade shows)
2. Choose Your Expense Tracking Method
How you track spending also matters. Some people prefer to use a spreadsheet that they update in real-time, while others record expenses in an app or business expense tracker. Some people also like to find expense management tools that completely automate the process based on integration with bank and credit card statements. While we don’t recommend manual expense tracking (i.e., using a notebook and a pen), there are several ways to keep track of business purchases. The most important thing is finding something that works for you and doesn’t overcomplicate the process.
3. Try Some Expense Tracking Tools and Software
Expense tracking software can make a significant difference in the accuracy and ease of financial management. There are several different expense management software available, with both free and paid versions, that you can choose from. Whether you’re looking for something basic with simple data entry or a tool to automate expenses from ongoing business spending, there’s probably an app for that. Some popular tools and software include:
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✔ Expensify |
✔ Zoho Expense |
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✔ QuickBooks Online |
✔ FreshBooks |
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✔ Xero |
✔ Wave |
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✔ SAP Concur |
✔ Rydoo |
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✔ Everlance |
✔ Spendesk |
There is also accounting software that allows you to track your business expenses in the same interface, which may be a better option for businesses with a smaller workforce. If you’re unsure about which option is best for you, talk to your certified public accountant for recommendations based on previous records of your expenses and overall business plan.
4. Open a Business Bank Account
One of the best things you can do when tracking your expenses is to open a dedicated business bank account. Having a separate account for your company creates a clear line between personal and professional spending, which makes bookkeeping far more straightforward. Some benefits of a separate bank account include:
Simplifies expense reporting and record-keeping by keeping all business transactions in one place.
Improves credibility with clients, vendors, and potential lenders who see you as more professional.
Provides easier access to financing since banks and investors prefer businesses with separate financial accounts.
Helps you spot errors quickly when reconciling statements.
5. Keep Business and Personal Expenses Separate
It’s also vital to keep your personal and business finances completely separate. Personal and business expenses and income should never be in the same bookkeeping process. This includes paying personal business from your business account, using cash without recording the transaction, and not recording anything that may overlap. Having a separate business bank account makes this easier, but it’s still important to mention, as mixed finances can be a red flag to the IRS.
6. Organize and Store Receipts Properly
Receipts are your proof of purchase, and without them, it’s difficult to substantiate deductions or reconcile accounts. The key is having a reliable system in place. If you prefer paper, use folders or envelopes to organize receipts by month. If you have digital receipts, use cloud-based folders for effortless expense organization and easy access. You can keep track of business expenses either by month or expense category, as long as everything is correctly labeled with the vendor’s name, date, and expense type. This is extremely important, especially in the case of an IRS audit in the future.
7. Track Expenses Consistently Throughout the Year
Expense tracking is most effective when you keep up with it regularly. Waiting until the end of the year often leads to missing records, forgotten purchases, and unnecessary stress. So, instead of taking a magnifying glass to your bank statements in April, consider scheduling an appointment to catch up with expenses at various intervals. For example:
Daily or weekly: Log new expenses as they happen. Even five minutes a day can save hours later.
Monthly reviews: Reconcile your expense reports with your bank and credit card statements.
Quarterly check-ins: Prepare for estimated taxes by reviewing income and expenses.
Year-end wrap-up: Confirm all expenses are categorized and receipts are stored, so tax filing is smooth and efficient.
Tracking business expenses throughout the year is a great way to help build a strong foundation of financial stability and long-term business growth, but it can get overwhelming. For professional accounting and bookkeeping guidance to ensure your expense tracking and tax strategies are aligned, partner with Del Real Tax today. Our experienced team can help you streamline your finances, stay compliant, and make sure more of your hard-earned money is put back into your business.
