As a small business owner, you wear multiple hats and face numerous demands, from overseeing a growing team to expanding your book of business. With so much already on your plate, managing your business expenses can become overwhelming, especially if you’re relying on manual processes and complicated spreadsheets.

If you're constantly chasing down receipts, manually reconciling transactions, and dealing with paper expense reports, it's time to rethink your expense management strategy. 

Let’s walk through the steps you need to take to track and manage business expenses effectively and gain better control over finances. 

Understanding business expenses  

Before you can track business expenses, you first need to understand them. Let’s begin by defining business expenses and unpack the different types you’ll encounter. 

Definition of business expenses 

Business expenses are the costs your company incurs while conducting normal business operations. These can range from everyday operational costs, like office supplies and utilities, to more significant investments, like equipment and property. 

What qualifies as a business expense? 

• Necessary and ordinary costs: Expenses essential for day-to-day business operations 

• Revenue-generating expenses: Costs directly tied to generating income or maintaining business activities

• Costs not associated with personal expenses: Expenses exclusively for business purposes

Types of business expenses 

There are several types of business expenses, each with its own implications and tax considerations. 

• Operating expenses: These are the costs required to run your business, such as rent, utilities, salaries, and office supplies. Operating expenses are usually tax-deductible in the year in which you incur them. 

• Capital expenses:  These are long-term investments, such as equipment, vehicles, or property. Capital expenses are typically depreciated over several years rather than deducted in the year of purchase.

• Fixed and variable expenses: Fixed expenses, such as rent and insurance premiums, typically remain stable over the short term, although they can fluctuate slightly or change annually. Variable expenses, such as raw material costs or sales commissions, tend to fluctuate more significantly based on the level of business activity.

The importance of tracking business expenses

Now that you understand what business expenses are, let’s answer an important question: Why should you bother tracking them?

In short, to ensure financial health and operational efficiency. But let me elaborate. 

Financial health and management

Keeping tabs on expenses provides a clear financial snapshot of the business. It helps finance teams understand spending patterns, identify trends, measure profitability, and make data-driven decisions to enhance a company's bottom line. Expense tracking is also invaluable for creating accurate budgets and financial forecasts. Analyzing past spending patterns can help you better allocate resources and plan for future company growth. 

Tax deductions and compliance

Let’s not forget taxes. Tracking business expenses is also critical to maximize your tax deductions and remain compliant with tax regulations. Maintaining detailed records provides clarity on your business' financial health and ensures precise tax reporting. This will help you avoid costly penalties and reduce the risk of any potential audits.

Expense control

By monitoring expenses and spending patterns, it’ll also be easier to identify areas where you can reduce costs, optimize the company budget, and eliminate unnecessary expenses. Expense tracking will reveal hidden costs and inefficiencies within the business. By pinpointing areas of overspending, you can take corrective actions to improve profitability and cash flow management. 

Software creep

As you adopt more digital tools, costs can quickly pile up if you're not keeping a close eye. Tracking business expenses helps identify underused or forgotten software and unnecessary subscriptions, allowing you to cut out what’s not adding value and free up budget for more critical investments.

Best ways to keep track of business expenses

Let’s dive into the steps you need to take to track business expenses and keep your company's financials in top shape. 

 1. Separate business and personal expenses

Establishing a clear line between your personal and business finances ensures transparent financial management and smoother operations as your business grows. Commingling funds will only lead to confusion, complex tax filings, and potential personal liability. Using dedicated bank accounts and credit cards for your business is one of the simplest ways to keep finances distinct. This will make expense tracking easier and improve cash flow management, bookkeeping, and tax preparation. 

Moreover, isolating business and personal expenses will also help build your business credit, unlocking better financing options in the future and increasing credibility with vendors and clients.

2. Create a budget

A well-structured budget is critical for tracking business expenses. Organizing your monthly and yearly expenses into categories (such as department, customer, project, etc.) allows you to track projected costs, compare that against actual spend, and derive valuable insights to make informed business decisions. 

Implementing a budget for your business offers several benefits: 

• It helps you establish precise expense and revenue goals against which to measure the performance of your business;
• It enables you to outline fixed vs. variable and one-time vs recurring expenses to better understand your expense base and allocate finite resources in the most efficient way possible; and 
• It highlights potential areas of improvement or overspending.

While many small businesses rely on spreadsheets for their budgeting needs, this manual approach is prone to error and gets complex as a company grows. Therefore, consider using a spend management platform to simplify the process and manage multiple budgets simultaneously.

With a tool like Extend, for example, you can control and track spending by creating budgets and allowing teams to use virtual cards for different expense needs across projects, clients, or departments. You can also delegate payment capabilities to others in your organization, freeing up your time while ensuring you keep complete control and oversight. 

Adopting such software in your business will help you organize your finances, reduce budget overruns, and simplify workflows and approval processes.

3. Use virtual credit cards

As any business owner knows, keeping tabs on transactions, staying within budget, and reducing unauthorized charges is easier said than done if you rely on a single or even a handful of credit cards. That’s because traditional credit cards don’t offer a centralized view of payments or promote user accountability. 

Virtual cards, on the other hand, provide a broader range of features and benefits that instantly simplify expenses.

With virtual cards, you can:

• Leverage dynamic spend controls, like spending limits and custom expiration dates
• Enhance security measures and mitigate the risk of fraud and misuse
• Easily track, monitor, and reconcile payments in real-time 
• Centralize your spending, gain immense visibility into your expenses
• Deploy your cash more effectively across various business initiatives 

You can create virtual cards from your existing corporate credit card to pay vendors and cover employee expenses. With them, you can take a more proactive approach to payments and significantly reduce the volume of manual expense reports each month.

 4. Choose an accounting platform

With the advent of new technology, like accounting software, you can make piles of paperwork and overwhelming spreadsheets a thing of the past or, at the very least, significantly reduce your dependence on these manual processes. 

Here are some of the advantages of using accounting software:

• Eliminate the need for labor-intensive work and cumbersome templates 
• Gain a wealth of financial data and consolidate into a centralized platform
• Facilitate more informed decision-making by generating comprehensive reports, such as income statements, balance sheets, and cash flow statements, at the click of a button

You can also easily integrate accounting software, like Quickbooks Online, into a spend management platform to further optimize accounting operations. With categorization, reference tags, and enhanced data reporting at your fingertips, you’ll get an interconnected environment where financial information flows seamlessly between systems.

5. Monitor your spending

After implementing virtual cards, a budget, and an accounting platform, you’ll need to leverage these tools for ongoing monitoring and tracking. This will allow you to identify discrepancies, avoid budget overruns, and ensure that every dollar spent aligns with the company's goals. 

Consistently monitoring your expenses helps you stay on top of your financial activities and address any irregularities or misuse. Some expenses can appear unexpectedly, and while they could seem insignificant at first, they can add up and strain the budget. Regularly review and monitor business spending against your budget to understand any variances, identify patterns, spot areas of overspending, and make adjustments before they impact the company's bottom line. 

Leveraging a spend management platform like Extend can enhance your ability to monitor expenses. You can track both virtual card transactions and out-of-pocket expenses across different categories, departments, and projects. With the option to digitize expense reports, your finance team can easily capture, review, track, and approve reimbursable employee expenses in one place. 

Setting up an expense tracking system

A system for tracking expenses is foundational in maintaining a business's financial well-being. Without a clear process in place, things can get out of control, leading to missed expenses, budget overruns, and financial uncertainty. 

Here’s how to set up an effective system for your business.

Choose the right tools

Make sure the finance tools you choose align with your business’ size, industry, and specific needs. Do your due diligence and consider the following criteria when selecting a platform to manage expenses. 

• Ease of use: Is it intuitive and easy for your team to use without extensive training?
• Integration capabilities: Can you integrate your existing software and financial systems?
• Scalability: Can it grow alongside your business?
• Customization: Can you customize categories, reports, and dashboards to fit your business' unique tracking and analysis needs?

Organize your expenses

Keeping business expenses organized is vital to better understand where company funds are going and for what purpose. Divide expenses into categories such as travel, office supplies, marketing, utilities, etc., that speak to their intended purpose. This will help you track spending by department or project and make it easier to prepare for tax season. Use labels and tags within your expense management tool to further refine expense categorization. For example, you might tag expenses by client, project, or payment method. This adds another layer of detail, allowing for more precise reporting and analysis.

Establish a routine

Consistency is paramount in any expense tracking process. I always recommend that finance leaders create a routine that helps them capture, record, and manage expenses so financial data remains accurate and reliable. I recommend setting aside time each week and month to review your expenses in detail. Weekly reviews allow you to spot any inconsistencies early, while monthly reviews allow you to analyze spending trends, compare actual expenses against your budget, and make any necessary adjustments. 

Best practices for tracking business expenses

Effective expense tracking is more than just record-keeping; it involves implementing ongoing practices that ensure accuracy, consistency, and efficiency.

Implement the best practices below, and you'll gain visibility into finances, make more data-driven decisions, and propel the business forward.

Keep receipts and invoices

Keep organized records of receipts and invoices, not only to ensure accurate expense tracking for the business but also to ensure you can claim deductions when tax season rolls around. Proper expense documentation is essential for tax filings and financial audits. Organizing all receipts and invoices ensures that you have the proof to back up your expense claims, support tax deductions, and reduce the risk of audits and penalties. 

Although managing physical receipts is doable, it's a manual practice that can become a hassle. Keeping receipts in an old shoebox or having them scattered across drawers in the office will not cut it as a company expands. Not to mention, depending on employees to keep their physical receipts and submit them on time can also delay reconciliation and make your job harder than it has to be. That’s why it's best to digitize business receipts. 

Various mobile apps offer this service, but you should consider a platform that provides receipt management alongside other key payment features. This consolidates the number of applications you must rely on to run your business.

For instance, with Extend’s receipt management features, you can:

• Attach receipts and notes to transactions
• Set specific receipt rules based on transaction amounts and card types 
• Identify transactions with missing receipts and send reminders via email and within the app
• Export transactions to enhance receipt matching

By consolidating receipts in one place, you'll achieve visibility, compliance, and a smoother tax season.

Regular reconciliation

Make reconciliation a regular activity, not something you leave until the end of the month. Regularly reconcile expenses with bank statements to identify discrepancies, prevent fraud, and maintain accurate financial records. To improve this process, consider using a spend management platform. Instead of waiting for the end of the month, you’ll be able to leverage real-time visibility into spending as it happens rather than getting surprises later. 

Leveraging technology for expense tracking

While it's entirely possible to manually follow the tips and tricks I’ve shared throughout this blog post, I strongly encourage you to consider the long-term benefits of technology. 

As your company grows, manual processes will become overwhelming. Today's technology offers unparalleled opportunities for real-time insights, automation, and integration with other financial systems. Make sure to use it to streamline the expense tracking process; you’ll spend less time on tedious tasks and more time on value-add activities that drive the organization forward.

Mobile apps

With the rise of mobile apps, it's never been easier to capture, categorize, and manage business expenses on the go. A spend management platform that offers a mobile app is a great tool to make expense management easier for you and your team. It'll allow you to:

• Snap photos of receipts for instant documentation
• Categorize and view transactions in real-time
• Save time by reducing the risk of losing proper expense documentation
• Keep records up-to-date and accessible

Cloud-based solutions

You can also leverage cloud technology to encourage better team collaboration and a seamless work experience while keeping your financial data and documents secure and up-to-date. With it, you can:

• Access financial data from any device and ensure real-time updates and control
• Enable real-time collaboration across remote teams or various locations
• Protect data with automatic backups, encryption, and secure access controls
• Quickly scale the system to meet your growing business needs, accommodating increased transaction volumes, more users, and additional features without requiring a complete system overhaul

Integrations with other tools

You should also strive for interoperability in your business, which means creating a seamless, interconnected experience between systems. Integrations will be key to doing this and achieving greater efficiency and accuracy across platforms. Here are some of the benefits of integrating payment systems:

• Automate the import of transactions and reduce manual data entry
• Minimize errors and ensure financial data is consistent and up-to-date across all platforms
• Save time by automating processes like transaction categorization, reconciliation, and reporting, allowing your team to focus on more strategic tasks
• Access real-time financial data from multiple systems in one place, enabling quicker and more informed decision-making
• Ensure data is centralized and easily accessible, making it easier to prepare for audits and maintain compliance with regulations

Common challenges and how to overcome them

Even with the best tools and processes, you’ll encounter challenges when tracking business expenses. Knowing how to address them is important to ensure company finances remain on track. Let’s explore common obstacles and practical solutions.

Inconsistent tracking

This can occur when you don’t have a recurring tracking process established, or employees forget to record or submit expenses on time. While it's common, don’t let it become a habit, as it can lead to gaps in financial data and inaccuracies in reporting. 

Tips to maintain consistency

• Implement an expense tracking process.
• Ensure team members understand the importance of timely expense submissions and what non-compliance can mean for the business (audits, tax impacts, potential fines). Make sure to properly train employees to do this effectively. 
• Leverage a spend management platform to automate tracking, streamline payments, and eliminate the need for paper receipts and manual reimbursements, limiting time spent for all stakeholders involved in the process.

Misclassification of expenses

Misclassifying expenses can lead to confusion, inaccurate financial statements, and missed tax deductions. This challenge typically arises when expense categories aren’t clear or if multiple team members are involved in tracking business expenses.

How to correctly categorize expenses

• Establish clear guidelines and categories for expense classification 
• Ensure everyone involved in expense tracking understands these and uses them appropriately
• Use labels and tags within your spend management tools to further refine classifications and minimize errors

Dealing with cash transactions

While still used, cash is notoriously hard to track, especially if physical receipt management is involved. Relying on cash transactions will only cause expenses to slip through the cracks and for financial records to be inaccurate. To improve visibility and control, consider adopting more innovative payment methods like virtual credit cards, which offer real-time tracking and detailed transaction data. 

But if you absolutely must track cash expenses, follow these steps.

• Require employees to log in their expenses on time, regardless of the amount
• Use a mobile app to capture and store images of physical receipts and reduce the risk of loss or damage
• Implement strict policies around cash usage to reduce reliance on these types of transactions

Take control of your business expenses with Extend

Extend is a spend management platform that makes it simple to manage business expenses across your entire company. 

Take a tour of the platform to test it for yourself, or if you’re ready to go virtual, get started here.