How to keep track of business expenses in 6 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 6 steps, including: 

1. Opening a business bank account
2. Choosing a business credit card
3. Connecting your spend management and accounting software
4. Choosing between a cash or accrual accounting system
5. Categorizing expenses and file receipts
6. Monitoring your business spending at a macro and micro level

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Read on as we break down each of these steps, delve 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

The best way to track business expenses is to leverage technology to automate the process. Manual bookkeeping processes are time-consuming and labor-intensive, not to mention prone to human error. Instead of relying on Excel spreadsheets, consider using expense management software that does the work for you, and automatically syncs with your accounting platform. Automated expense trackers are an especially useful solution for small business owners. 

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With that out of the way, here’s how to track business expenses, step-by-step:

Step 1. Open a business bank account

Keeping your business and personal expenses separate makes bookkeeping and filing taxes much easier. For that reason, it’s important to open a dedicated business bank account that’s distinct from your personal one. Be sure to choose a separate business checking account or debit account that provides useful features, such as low fees, online access, and the ability to integrate with accounting software. This not only helps with financial management, but also boosts the credibility and professionalism of your business.

Step 2. Choose a business credit card

Choosing a business credit or corporate card can help you maintain a proper division between your personal and business expenses. What’s more, signing up for a business card with your EIN can help you start building your business credit score which can provide a variety of benefits down the line. 

Step 3. Connect spend management and accounting software

It’s important to choose accounting and spend management software that automates expense tracking for you. 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.This allows you to automatically send your card transactions to accounting platforms like Quickbooks or Freshbooks to generate expense reports.

Step 4. Choose between a cash or accrual accounting system

When setting up your accounting software, you’ll want to choose between a cash or accrual system. In cash accounting, transactions are logged when payments are received, whereas accrual accounting records both bills and payments. Accrual accounting offers a clearer financial picture, and is usually necessary for larger businesses.

Step 5. Categorize expenses and file receipts

The IRS mandates that you keep all hard copy receipts and other financial records, such as bank statements, for a minimum of three years. If you use a business card with spend management software (like Ramp), you can upload and store digital copies of receipts, and further categorize them in a way that works for you. This is an especially useful solution should your company be audited. 

Step 6. Monitor spending at a macro and micro level

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

Spend management software can help by making your transactions easily viewable by employee, merchant, expense category, or department. This software can also reveal whether you’re spending more on certain categories or vendors than the industry average.

Why is it important to track and control business expenses?‍

Accurate and constant business expense tracking can help you to accurately gauge your current financial resources, and plan for the future. But the benefits even extend beyond that. 

Gain an accurate view of company performance

When it comes time to look at monthly P&L statements, it’s important that you’re keeping track of both the big items like freelancer and contractor expenses or marketing ad budget at the same time 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 see what you’re doing right or wrong and adjust based on business needs.

Reveal spending issues

If you’re unaware of where your money is going each month, you will not be able to modify bad financial behavior that negatively impacts your company’s profitability. Daily and monthly expense tracking allows you to find trends or outlying costs.

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To get a clear picture of your business finances, it’s important that you are catching little costs that add up and deciding 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 team managers to keep tabs on their team's operating budget, performance, and spend habits to reduce maverick spend).

‍Help you stick 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 you make sure that your spending habits are in alignment with your established plan. At the end of each month, you can review business expenses and compare your spend to projected spend. If you go over, you can identify where you can make cuts. 

Prepare for tax season

Tracking your business expenses can make your company better prepared for tax time. The IRS requires that you keep the receipt for any business expense that’s 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 tracking and managing business expenses

Generally, the smaller a company is, the easier it is to track business expenses. That said, even the best businesses face significant hurdles when it comes to managing expenses.

The sheer scale of it all

The magnitude of operational expenses to track can seem overwhelming. Managing tail spend, in particular, can be difficult to track since it typically makes up 80% of business transactions but just 20% of costs. The sheer quantity of it all can make business expense tracking and categorizing a nightmare.

Human error

When processes are dependent on humans, there will inevitably be mistakes. Manual processes are harder to optimize, since these errors will always be present to some degree. 

No wonder 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 as a result.

Expense fraud

If you rely on manual expense management and tracking, it becomes difficult to check and verify every business expense for accuracy. This exposes your operation to expense report fraud—yet another argument for automating the business expense tracking process. 

Time delay

Since expense audits are usually limited to end-of-the-month financial reports, the information you have to use may be out of date and less useful by the time all of the expenses are laid out. 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 operating expenses—that is, the expenses your company incurs by keeping the business operational. While raising prices may turn off customers, reducing operating expenses rarely has a direct impact on price or quality.

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So, by tracking and controlling operational costs, you can improve your financials and manage cash flow efficiently without impacting the appeal of your product or service to customers.

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Some common types of business expenses include:

Office-related expenses

• Rent
• Utilities
• Telephone & Internet
• Office supplies and equipment
• SaaS subscriptions
• Professional services like accounting, legal, and other contractors
• Insurance

Cost of goods sold

• Direct materials
• Hosting expenses to deliver the software
• Costs for third-party software related to the delivered product
• Personnel costs for implementation (consulting, data migration, training)
• Personnel costs for the customer support team

Sales and marketing-related expenses

• Advertising
• Travel expenses
• Sales materials
• Software and tooling
• Direct mailing

Compensation-related expenses

• Compensation
• Payroll tax expenses
• Sales commissions
• Employee benefits, including health insurance and 401k or pension plans

How to track business expenses for free

If you’re an entrepreneur or self-employed, you may not be ready to start using spend management or accounting software. That said, you can still find a free accounting method to track your small business expenses.

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Business expense tracker apps like Ramp, Expensify, and Zoho Expense, and Rydoo allow you to track business expenses at no cost in their free plans. They provide various tools such as receipt scanning and storage, personalized reports, and multi-currency support to help you accurately monitor expenses and keep an eye on your financial situation. As mobile apps, it's easy to track expenses with them on the go.

Track business expenses with Ramp’s spend management software

At Ramp, we offer a corporate card that helps you streamline your business expense management and tracking processes. Specifically, we allow you to set spending controls for how much, how often, and where the cards can be used. 

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Since we’re a charge card, we don’t operate on an interest model. We aren’t powering your purchases and hoping to make money on interest accrued over time. Your balance is due at the end of the billing period, so there’s no regular interest compounding. There are no annual fees or foreign transaction fees, and you’ll earn 1.5% cash back on purchases.