When you're a small business owner, keeping your finances organized is crucial to your success—and it all starts with a good system for tracking your business expenses. Expense tracking is the gateway to cutting costs, improving cash flow, and optimizing your deductions during tax time. Long gone are the days of balancing a checkbook and keeping an Excel spreadsheet. Now, there are dozens of tools out there that help business owners automate expense tracking and harness financial data that can level up your business. Here are some of the best tips and tools for tracking your small business expenses. How to Track Business Expenses Open a Business Bank Account Get a Business Credit Card Get an Accounting App Evolve Your Tracking Methods Keep Your Business Receipts Record and Categorize All of Your Expenses Consider Consulting an Accountant for Tax Planning 1. Open a Business Bank Account Many businesses start as solo operations, and owners in these situations often focus on gaining traction and ignore everything else. It’s easy to create an accounting nightmare for yourself when that causes you to neglect the accounting function early on. Business owners often run into this problem after a year or so of operations when they have to file their taxes for the first time. For example, they might look back at the year and find they have no idea how large a tax deduction they can take for their travel expenses because each trip included some unknown amount of personal expense transactions. Come tax season, you won't have to dig through your statements and transactions to determine which expense was for your groceries and which was for your new office desk. To avoid that issue, open a business bank account before you do anything else. Split your business and personal expenses as soon as possible by opening up separate accounts for your company. That usually includes a checking account and a credit card. That said, they don’t have to be official business accounts, which may have different requirements or costs than personal ones. You can still use a card in your name as a sole proprietor. Just keep your funds separate to create a distinct paper trail. You'll also get perks like checks with your business name on them, which makes your transactions appear more professional. Opening a business account and keeping it in good standing will help you build a business banking relationship as well, which may help you out when it comes to apply for a business loan. 2. Get a Business Credit Card Contrary to popular belief, it’s not usually necessary to keep the receipts for all your business expenses. Feel free to ditch that messy shoebox crammed full of paper copies. While business owners used to need those receipts for tax expense reporting purposes, they’re not as beneficial anymore. You generally only need to have documentation that proves the following: What you purchased When you purchased it How much it cost you Fortunately, as long as you make your business purchases with dedicated business accounts, you’ll usually find all of that information in your bank statements and credit card bills. Nowadays, you’d likely only need to keep an expense receipt if you want more insight into a transaction than a line item on a statement could give you. For example, if you paid $1,500 to Amazon you might not be able to tell what it was for from your business credit card bill. You may need a receipt to document that $1,000 was for your new computer while $500 was for supplies. However, you still don’t need to keep any receipts in paper form. It makes them far too easy to lose or damage beyond legibility. Take pictures of them instead and save the images in a folder for your records or auto-upload it to your bookkeeping software. 3. Categorize Your Expenses Whether you complete your business purchases with a credit card, debit card, or cash, you need to have a system for categorizing them. It’s not enough to know that your business spent $500 last week. You need to keep track of which deduction to take. In general, there are three ways to do this. The old-fashioned way is to keep a document or spreadsheet and manually log every transaction there. If your business pays for things in cash, you'll have to use that method. However, there’s little reason to pay for anything in cash anymore. If you want to make tracking business expenses easy, always use a credit or debit card and create an electronic record for your transactions. That opens up two other options for categorizing business expenses, both of which are superior to tracking things by hand. Namely, you can let either your bank or accounting software assign each expense category, manually updating them only when necessary. Which option makes more sense for you depends on your needs. If you have a relatively low volume of expenses and little complexity, you can probably use your bank account or credit card statements to stay organized. However, the more sophisticated your business transactions become, the more likely you’ll need bookkeeping software to stay organized. This makes it much easier to adjust your digital records directly. 4. Schedule Regular Check-Ins Many business owners are uninterested in managing the financial side of things. They start their companies because of ambition or passion, and bookkeeping is significantly less exciting. As a result, it’s easy to procrastinate on the issue. Unfortunately, tracking business expenses isn’t something you can neglect for long. Do you remember your days back in school when you received year-long projects? If you started at the last minute, you’d never be able to catch up in time. Business expense management is a lot like that. You have the whole year to get your financial records in order, and you can’t afford not to use that time. Procrastination causes all sorts of problems, such as: Forgetting the purpose or details of expenses Compounding any early accounting mistakes Creating a massive headache for yourself during tax season Conversely, if you stay on top of your bookkeeping from day one, everything goes much smoother. Expenses are fresh in your mind when you categorize them, fixing mistakes earlier prevents you from making them again, and you don’t need to rush at tax time. Ideally, you should check in with your business expenses every month. If you don’t have enough activity to make it worthwhile, you can use a quarterly schedule instead. You should generally check your expenses at least quarterly because that’s how often you need to make estimated tax payments. If you don’t know how much taxable income you had in the last quarter, you might not know how much you need to pay. 5. Finalize Your Financial Statements Ultimately, business owners track their transactions to translate them into a balance sheet and income statement. These documents detail your business finances, including assets, liabilities, revenues, and expenses. At the end of every year, you’ll need to update your financial statement to reflect the activity from the previous twelve months. Readers can use them to determine how much you earned or lost and your subsequent financial position. Your financial statements essentially define your business, and you’ll need them to inform many different processes, including: Calculating your annual tax liability Assessing the success or failure of your operation Determining whether you qualify for a business loan Bookkeeping software is especially helpful at this stage. Creating your balance sheet or income statement in a spreadsheet is laborious and makes you susceptible to human error. You have to build the formulas yourself, and one mistake can throw everything off. Meanwhile, bookkeeping software like Lendio's software can automatically categorize your transactions, generate your financial statements, and then update them in real-time in connection with invoicing software. Give it a try today! 6. Analyze Your Business Expenses Once you have an accurate idea of your business’s spending trends, you have everything you need to pinpoint potential problems. More specifically, you can look for areas where you’re spending more than you’d like and make adjustments as needed. Overspending doesn’t necessarily mean you were irresponsible with your budget like it would in your personal life. It could also mean you ran into surprise operating expenses or that costs ended up being higher than you expected. As a result, tracking expenses can help you develop more accurate expectations, learn lessons from variances, and find areas where you can save money. For example, you could plan future estimated tax payments using your current revenues and expenses. Bookkeeping software is also great for this kind of analysis. You can use it to facilitate many beneficial activities, like generating an expense report, comparing multiple data ranges, or drilling down into a financial statement. 7. Consider Consulting an Accountant for Tax Planning With accurate financial records in hand, you can start to refine your tax strategy. If your business is sufficiently sophisticated, with reasonably high revenues and expenses, it’s often worth visiting an accountant for advice. That doesn’t mean you have to hire one as an employee. Many small businesses don’t have the cash flow or the need to do that. Just reach out to a Certified Public Accountant (CPA) office and contract them out to help you with your tax strategy. With an organized business expense tracking system and clean financial statements, any CPA would be happy to work with you. It makes their job much smoother, saving them time and you, money. They can help you lower your tax liability each year by reorganizing your business’s legal structure, finding all potentially deductible expenses, and leveraging contributions to tax-advantaged accounts. Reap the Rewards of Meticulous Tracking Tracking all your business expenses is a lot of hard work—but it’s well worth the cost. With accurate expense data, you’ll be able to create dependable budgets, cash flow forecasts, and financial reports. You’ll know where you’re overspending and what expenses you need to cut or adjust to turn a profit. With historical data to look at, you’ll know when the seasonal sales are coming and when the expenses tend to accumulate. Knowing this, you can prepare your business with a cash cushion or with the right small business loan. Come tax season, you’ll be relaxed (or more relaxed) knowing the hard work is already behind you. If you choose to hire an accountant to handle your taxes, you’ll pay a smaller bill since they’ll have far less to do. Plus, you’ll take advantage of more tax deductions and credits, lowering your tax burden and saving your business extra cash. Often, becoming a profitable business doesn’t require you to double your sales—it requires you to cut your costs. With expense-tracking data to guide your decisions, you’ll be able to confidently remove unnecessary expenses and prioritize the costs that move the needle. No, expense tracking isn’t always the flashiest administrative task, but it’s a necessary one. FAQ The best way to track your business expenses is to create separate bank accounts and credit cards for your company and connect them to an expense tracking software. There are many benefits to this approach, including: Your expense tracker app can automatically sort transactions, categorize them, and use them to generate financial statements. You can manipulate your financial data more efficiently, facilitating better cash flow analysis. You're much less susceptible to human errors, such as typos in numbers or formulas. Fortunately, tracking your small business expenses doesn’t have to be expensive. There are several different ways to go about it without having to open your wallet at all. For example, you could: Rely on the bank statements and credit card statements for your business accounts. Sign up for a free small business accounting software. Note that both options work best if you have separate accounts for your business and personal funds. Otherwise, you’ll have to spend a lot of time going through your past activity and sorting it into each bucket. You could also maintain a ledger by hand that contains all your transaction details, but that’s a lot more work and mistakes can be much more likely. Sole proprietors should track their business expenses much like any other business structure. You should still think of your company as an entity distinct from yourself and open up separate bank accounts and credit cards for it.