How to track business expenses in 6 simple steps

There are plenty of once-Goliaths that crashed and burned because of poor business expense management. Just look at WeWork: At one point, they were primed for market domination and a $47 billion dollar valuation. Then, their S-1 hit the internet, and the walls began to crumble. It took investors and analysts minutes to see that the company's losses far surpassed its revenue—for every dollar it made, the company was spending two.

In the span of six short weeks, a giant had fallen.‍

The lesson that can be drawn from this is that what's equally important to top-line growth is the costs required to achieve it. Market shocks can come from anywhere, and having a strong expense management culture can help you not just survive, but thrive.

Want to know how to track business expenses and control costs? In this article, Ramp will cover how you can stay on top of expenses to make smart financial decisions.

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- and labor-intensive, not to mention prone to human error. Instead of relying on Excel spreadsheets, consider using expense management software that automatically syncs your expenses to your accounting platform.‍

Here's how to track business expenses, step-by-step:

1. Open a business bank account

A designated business bank account is crucial in order to keep track of expenses accurately. This division between business and personal finances makes bookkeeping and filing taxes much easier. Be sure to choose a business checking 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.

2. Choose a business credit card

Similarly, a business credit card or corporate card helps keep track of expenses—as long as you use it exclusively for business transactions, and keep non-business purchases on your personal credit card.

3. Connect spend management and accounting software

Choose accounting software and spend management software so that you can automate expense tracking. 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. You can automatically send your card transactions to accounting platforms like QuickBooks or FreshBooks to generate expense reports.

4. Choose between a cash or accrual accounting system

When setting up your accounting software, you'll want to choose your preferred accounting 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.

5. Categorize expenses and file receipts

The IRS mandates that you keep all hard copy receipts and other records, such as bank statements, for a minimum of three years. If you use a business card with spend management software, you can upload and store digital copies of receipts categorized by expense type. Use folders to store any paper receipts labeled by date or category so that you can easily find them should your company be audited.

6. Monitor spending at a macro and micro level

Ideally, you need to have both a macro and micro vantage point for your spend. You should regularly review the top-line view of your company's spending, as well as specific business expense categories and employees' spending. Spend management software can help by making your transactions easily viewable by employee, merchant, expense category, or department. Such software can also surface spending insights to 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?‍

Companies that don't track and control business income and expenses are unable to adequately account for their financial past. Much like history, losing your grip on the past relinquishes control of your company's future trajectory.‍

Accurate and constant business expense tracking keeps your business finances in line in several different ways, including:

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.

To get a clear picture of your 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 most important 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 went over, see where you can make cuts. If you were under, look for places to allocate more money.

Prepare for tax season

If you want to follow the law and avoid audits (as well as make sure you get all the proper tax deductions), you must be prepared for tax season. 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, including:

The sheer scale of it all

The operational expenses listed above are just some of the expenses you need to consider and manage regularly—some of which you'd want to amortize or depreciate over time. Managing tail spend, in particular, can be difficult to track since it typically makes up 80% of 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 (which is why many businesses seek to automate these processes). According to CFO Innovation, human error is the number one problem with tax and accounting mistakes. No wonder so many businesses are looking for the best ways to digitize their financial activities (which will especially come in handy during tax time).

Approval delays

Manual processes tend to cause several delays, and even digital processes can suffer from this same issue. 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 verify every business expense for accuracy. This exposes your operation to expense report fraud, a form of asset misappropriation. According to a 2022 report from the Association of Certified Fraud Examiners, asset misappropriation—which includes expense report fraud—accounts for 86% of all occupational fraud cases. Small businesses have been shown to suffer higher losses from fraud compared to larger organizations, likely because they tend to have fewer anti-fraud measures, like automated expense management systems.

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.

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.‍

Some common types of business expenses include:

Office-related expenses

• Rent
• Utilities
• Telephone and 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 come up with a free accounting method to track your small-business expenses.

You can track business expenses in Excel by creating columns with the date, description, payment method, and amount for each expense. Then, add the totals on a weekly, monthly, or quarterly basis to get a clear view of your spending. If you need help setting up your spreadsheet, look up Excel expense tracker templates.

Business expense tracker apps typically include a range of tools such as receipt scanning and storage, personalized reports, and multi-currency support. These features assist you in accurately monitoring expenses and maintaining oversight of your financial situation.