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Guide to small business expense tracking

Learn about small business expense tracking to organize your short- and long-term finances. It will help you have a better understanding of your cash flow for tax season and beyond!

Tracking expenses using a calculator

Independent business owners are pulled in many directions. So few hours in the day means little time to learn how to track expenses for our small business. Not only are independents the leaders and decision-makers of a brand, but oftentimes they are also the secretary, marketing agency, client manager, and more.

For most of us, the last role we want to take on is that of bookkeeper.

I get it—accounting is overwhelming. Rest assured that you’re not alone in that feeling. Nearly half of business owners dread doing their own accounting and finances. However, if you want your businesses to be profitable, you have to have a real understanding of both revenue and expenses. For this reason, tracking expenses in your small business is key.

Luckily, you don’t have to get a degree in accounting or even take a course to learn the basics of tracking expenses. These days, professional business expense trackers like the HoneyBook + QuickBooks integration can do it all for you digitally. All you need is a basic understanding of expense tracking and some preliminary setup.

Why is it important to track expenses?

We all know that tracking your expenses is important. One thing that may fly under the radar for independents is all the ways independents can use expense reports. As a business owner, you’ll need your expense information for taxes as well as your year-end reports. They’re also necessary for financial planning throughout the year. The more you know about your expenses, the more you can optimize your tax deductions, cash flow, and future planning to grow and scale.

Preparing for tax time

Tracking expenses helps you organize your tax deductions when that time of year comes around. Whether you’re a sole proprietor or single-member LLC, you’ll be able to deduct many business expenses, including 

  • Software subscriptions
  • Bills and utilities for your office
  • Business travel
  • Contractor fees and payments
  • And more!

Reporting your expenses accurately can help you yield bigger tax savings, making tax season less stressful overall.

Understanding and optimizing your cash flow

When you have an accurate view of your income and expenses, it’s easier to plan both your short- and long-term business financial goals. In the short term, you’ll know how much money is coming in each month to be able to pay yourself and your employees or contractors.

You’ll also have more information on hand to ensure your business is profitable from month to month. If you notice you’re spending money on things you don’t need, you can cut those expenses while also bringing in more clients each month to boost your revenue. 

If you’re spending more money than you make, eventually you’ll run out of cash to do business. Tracking your expenses and cash flow will show you if you’re truly making money, or if you’re overestimating earnings by underestimating expenses.

Expense tracking also helps you to identify your cost per product or service. Having true transparency regarding what it costs to produce one unit of your product or provide one service can help you price yourself better and find areas for cost reduction.

Understanding your expenses can help you reach financial sustainability, which allows you to plan for the future and reach new goals in your business. With a steady cash flow, you can forecast how much money you’ll make to make better decisions about investments for your business. With that in mind, here are our tips for accurately tracking expenses.

1. Set up a business bank account

To track your business expenses accurately, the first step is to set up a business bank account. Even if you’re a new sole proprietor, separating your personal and business expenses as soon as possible will make everything easier in the long run. 

Separate accounts will make it easier to do your taxes, hire employees, purchase resources for your business, and reduce your personal liability. This is especially true if you obtain an EIN and become a single-owner LLC. With a clear picture of your business expenses, you can also keep track of how they change over time.

2. Audit and categorize expenses for your business

Even if it’s just with pen and paper, sit down and sketch a rough outline of all the things you spend money on for your business. Now, decide which categories they go in. For most business owners, the categories will include bills and utilities, payroll, equipment, resources and tools, office, and advertising. Here are some of the most common categories you’ll find and how you can classify them:

  • Cost of Goods Sold – These are the costs directly associated with selling your products or services. You can also think of this account as the price of your product or service without any markup. Some examples of this account are packaging, raw goods, or shipping. If you are a service-based business, sometimes this account can be hard to classify. Some examples of service-based COGS include merchant fees, commission fees, and transaction fees.
  • Marketing and Advertising – This expense is the cost to market your product. Some examples of this account are social media ads, branding costs, software, or website development.
  • Dues and Subscriptions – This expense captures all of the monthly subscription services that you purchase for your business. So any professional services like Adobe Suite, HoneyBook, website hosting, cloud storage, or others would go here.
  • Salaries and Wages – This expense captures all of the wages and salaries that you pay to your employees and yourself. If you have employees or pay yourself a salary, you want to place that expense here. It’s important to include 1099-misc wages in this bucket as well. An exception to this category is if you’re a sole proprietor or single-owner LLC. If you take an owner’s draw, you will pay income taxes on the draw similar to a 1099-misc worker. If you pay yourself a salary, you’re taxed like an employee, and this requires that your business is set up as an S Corp or a C corp.

Your specific categories may include more or less of a given expense depending on what you need for your business. By mapping out these categories, it’ll be easier to track your expenses moving forward. Whether you use expense-tracking software or a spreadsheet, identifying expense categories and tracking from the start of the year will save you a headache down the road.

3. Invest in software that tracks your business expenses

Thankfully, we live in a time where there are many expense tracker apps and user-friendly software options. As an Independent business owner overseeing your own accounts, an expense tracking app can make sure everything is categorized and nothing slips through the cracks. 

Even better: Investing in software that manages online invoices and payments as well as expense tracking can make cash flow analysis easy.

Utilizing a clientflow platform like HoneyBook will help you stay even more organized. HoneyBook helps clear administrative work off of your plate with a nifty QuickBooks integration. You can track your expenses as easily as snapping a photo of a receipt. Extensively, whenever someone books your services and pays, that revenue is tracked. You can enter your expenses on your computer or even on the go with a mobile app, so your online payment software is always up-to-date with your cash flow.

4. Understand how to use your expense reports

You might be thinking, “I know how important it is to track my expenses but how do I actually do it and create reports?” 

This is another reason why it’s so important to choose the best expense-tracking software for your needs. In addition to logging your expenses, you also need to make sure they’re categorized correctly so that your reports are accurate.

Tagging your expenses

When adding in your expense transactions in HoneyBook, you can classify them into the categories you already mapped out. 

To make it even easier, HoneyBook already has a list of 35+ expense accounts to choose from so it helps you take the guesswork out of classifying your expenses. Additionally, if you have a one-time expense for a specific client, you can include the project name next to the expense for more insights into project expenses and overall profit.

Let’s explore a couple of scenarios when it comes to expense tracking. Let’s say you’re a freelance artist developing a commission piece for a client. You’re currently using HoneyBook as your clientflow platform, so when that subscription expense hits your account, you place it in the “Dues and Subscription” category. You buy a new canvas for the painting so that canvas becomes a part of your Cost of Goods Sold. 

Lastly, you decided to rent a studio to finish your piece so the studio rental expense would be assigned to the “Rent” category. Pretty easy right?

Let’s look at another scenario. Say you’re a business strategy consultant for online businesses. You generate a lot of leads through Facebook, so you run Facebook ads every month. That expense would fall under Marketing and Advertising. You rent office space so you pay monthly expenses like electricity and water, so these costs fall under Utilities. 

Lastly, you just purchased a work laptop and accessories. That would need to be placed under your Computer and Internet expenses. Once you learn how each transaction is classified, it helps you to easily assign these transactions and keep your bookkeeping neat and tidy.

Generating a profit and loss statement

After you’ve tracked all your expenses, you’ll want software that gives you a profit and loss report. Profit and loss (oftentimes referred to as P and L or income statement), showcases a summary of how much you’ve made or lost after all of your revenues and expenses are tracked. This is a “period of time” report, meaning that this summary covers data over a designated range of time. This is one of the most important statements for businesses so make sure you keep this updated.

Here’s how P&L statements are structured:

  • Revenue – The money you’ve made (pretty easy, right?) HoneyBook automatically imports your revenue for you.
  • Cost of Goods Sold – As mentioned, all of the costs associated with selling your products or services
  • Gross Profit – Gross profit is the profit or loss after subtracting the cost of goods sold. This is a great calculation to help you determine if your cost per unit is appropriate in comparison to your price
  • Expenses – All other costs associated with your business (outside of the cost of goods sold)
  • Net Profit/Loss – Gross profit minus expenses. This is the summary of all of your revenue minus expenses which shows you if your business is profitable or not, and by how much

Next steps for small business expense tracking

Now that you know the basics of tracking expenses, you should have everything you need to get started. Just follow these quick steps, and you’ll be on the track to more organized business finances!

Final thoughts on expense tracking

  1. Try to track expenses for your small business as soon as you can! It’s a lot easier to remember what you spent when it was a recent transaction
  2. Batch import your existing expenses to your expense-tracking software using a .csv file. You can always download your bank transactions and import relevant expenses to save time
  3. If you don’t know how to classify an expense, mark it and ask an accountant, friend, or Google!

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