Keeping track of business expenses is super important, but it can be tough when things get busy. It is easy to get wrapped up in day-to-day activities and forget all about the expenses list. However, tracking business expenses is the key to knowing how your business is doing. It lets you see where your money is going, so you can decide when to invest more and when to scale back.
What are Business Expenses?
Business expenses are the necessary business costs you incur while running your business. Labor costs can account for as high as 70 percent of the entire cost of running a business. By keeping track of your business expenses, you can monitor profits and losses, identify trends and make forecasts. Knowing how much money you have and where it is going helps you plan a more responsible use of funds.
Plus, tax authorities allow for the deduction of business expenses if you have proper documentation, which can lower your taxable income. So, tracking expenses for business and keeping detailed records is not only good practice but also beneficial for tax.
Common Types of Business Expenses
Boosting your business’ bottom line can often be achieved by cutting operating expenses. These are the costs required to keep your business running. Unlike raising prices, which might deter customers, reducing operating expenses usually does not affect your pricing or product quality.
By monitoring and managing operational corporate expenses, you can enhance your financial health and manage cash flow more effectively. Here are some typical types of business expenses :
1. Related to Office
- Lease and rent payments
- Utilities
- Phone and internet services
- Office supplies and equipment cost
- Software as a Service (SaaS) subscriptions
- Necessary professional services, such as accounting, legal and other third-parties
- Insurance policies
2. Related to Sales and Marketing
- Advertising costs
- Travel costs
- Promotional materials
- Software and tools
- Direct mail campaigns
3. Related to Cost of Goods Sold (COGS)
- Raw materials
- Expenses for vendors/third-party associated with the product
- Software delivery hosting charges
- Consulting, training, data migration costs
4. Related to Compensation
- Employee salaries
- Payroll taxes
- Sales commissions
- Employee benefits, such as health insurance and pension
Why is it Important to Manage Business Expenses?
Keeping precise and consistent track of business expenses not only helps you understand your current financial situation, but helps you prepare for the future. It also offers many additional advantages like:
1. Gives Clear Insight into Company Performance
Getting an accurate understanding of company performance involves tracking both significant expenditures like freelancer fees, contractor expenses, and marketing budgets. Even smaller items like the occasional client lunches matter. This comprehensive approach allows you to assess your financial landscape thoroughly. It also enables you to identify successful strategies for how to manage business expenses, along with areas needing adjustment.
2. Helps Identify Spending Issues
If you do not know where your money goes each month, you can’t address financial habits that might harm your company’s profitability. Tracking expenses for business (including daily and monthly) helps pinpoint trends and unexpected costs.
To understand your business finances, it is important to identify and evaluate small costs (the ones that keep piling up) and assess larger expenses. This applies broadly across your entire business. Doing so empowers team managers to monitor their team’s budgets, performance, and spending habits to minimize unauthorized expenditures.
3. Ensures Adherence to Budget
Creating a budget is just the beginning. The real challenge lies in actually sticking to it. Consistently tracking business expenses is crucial for aligning your spending habits with your budgetary plan. By reviewing expenses monthly and comparing them to projections, you can find out areas where adjustments are needed in case you exceed your budget. This also puts you in a position to make cuts where necessary.
4. Keeps you Ready for Tax Season
Keeping track of your business expenses helps you prepare effectively for tax time. Ideally, your system should automatically log receipts, simplifying the identification of tax-deductible payables and receivables when filing your tax returns.
Common Challenges in Managing Business Expenses
Typically, smaller companies find it easier to track business expenses. However, all businesses, regardless of size, face many challenges when managing them.
1. Scale
The sheer volume of operational business expenses can feel daunting. Tracking tail spend, which constitutes 80% of business transactions but only 20% of costs, is especially challenging. Managing and categorizing such a large quantity of expenses can be a huge task.
2. Human Error
Dependence on manual processes is a recipe for mistakes. Human involvement could surely introduce inevitable errors that are difficult to eliminate entirely. It’s no surprise that many businesses are seeking efficient ways to digitize and automate their financial operations.
3. Delays in Approval
As financial monitoring tasks move through the accountability chain, expense reports can sometimes be overlooked or forgotten. This could lead to delays in approval or reimbursement.
4. Fraud
Relying on manual expense management even for small business makes it challenging to thoroughly verify every business expense. This increases the risk of business expense report fraud. It also puts the spotlight on the importance of automating the corporate expense tracking process.
5. Delay in Real-Time Monitoring
Expense audits typically occur during end-of-month financial reporting. This oftentimes makes the information outdated and less actionable by the time all expenses are documented. Real-time spending monitoring is essential if you want to make timely adjustments.
Benefits of Tracking Business Expenses
Organized financial records: Keeping accurate business expense records ensures readiness for tax filings, audits etc.
- Clear spending insights: Understanding where your business funds go helps show areas for reducing potential expenses. This improves cash flow management.
- Tax deductions: Diligently tracking expenses provides evidence for claiming tax deductions. It potentially lowers your taxable income when tax season arrives.
- Enhanced financial planning: Analyzing expense reports helps identify trends such as overspending and lets you adjust better for effective financial planning.
- Fraud detection: Monitoring business expenses closely helps detect and prevent financial fraud.
How to Keep Track of Business Expenses?
One of the most effective ways of tracking business expenses is with technology and automation. Manual bookkeeping is not only time-consuming and labor-intensive but also susceptible to human errors.
Businesses no longer need to rely on traditional methods of collecting and submitting paper receipts to accountants. One of the easiest ways to track business expenses is adopting expense management software. This automated approach is particularly beneficial for small business owners who are looking to optimize their financial management processes.
Let’s dive into how to track business expenses, step-by-step:
Step 1: Open a Business Account
The first step is to open dedicated financial accounts which are exclusively for your business. This includes opening a business checking account, a business savings account, and a merchant services account (for card transactions). Having separate accounts makes financial management better. It brings all expenses in one place and simplifies the process of claiming tax deductions.
You can obtain a separate card for business expenses to do away with sorting receipts. Plus, using a dedicated business credit or debit card helps maintain organized credit history. It also provides rewards such as cash back on purchases, flights, and hotel bookings.
Step 2: Selecting Expense Software
The next step in managing expenses is choosing expense software that automates record-keeping and expense tracking. With this, the task of monitoring and organizing expenses becomes a lot easier. A software to keep track of business expenses helps you keep accurate records without exceeding your budget.
During setup, you can decide on your preferred income and expense reporting method. This may include cash accounting (recording transactions upon receipt of payment) or accrual accounting (tracking bills and payments received).
Step 3: Link Your Financial Institutions
To improve the tracking of business expenses, connect your expense software directly to your banks. This allows for automatic downloading of all bank transactions and categorization of expenses. You can also integrate additional features, such as importing daily transactions and downloading bank statements, which simplifies the reconciliation process.
Integrating your bank accounts with your expense software also helps you manage banking transactions directly from your software interface. This removes the need to log into separate bank accounts. The synchronization also reduces the time spent on expense tracking and ensures accurate records.
Step 4: Organize Your Receipts
To ensure accurate tracking of business expenses, diligently organize your receipts during daily operations. Use labeled folders to store paper receipts and arrange them chronologically or by categories for easy reference. Technology has simplified expense tracking with mobile apps and business expense tracker apps that integrate with expense software.
You can capture and track all expenses, including mileage, flight costs, and meals, ensuring you retain receipts for each expense category.
Step 5: Evaluate Your Business Expenses
To effectively monitor expenses, regularly review your expenditure records. Take time to analyze reports, look at numbers and identify trends in spending patterns. This allows you to understand where exactly your funds are going and how expenses accumulate over time.
Final Thoughts
Managing business expenses becomes easier when you track them consistently and do it in the right way. To overcome the challenges associated with the process, you can leverage the power of expense management software. You can track your business expenses with Akrivia HCM’s Expense Management Software. Akrivia HCM helps you save time, reduce errors and get super transparency when claiming expenses. It automates the business expense tracking process which saves you several hours every week.
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