Small business expense tracking: tools and best practices

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!

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.

Jump to:

• What are the benefits of small business expense tracking?
• 3 tips for accurately tracking business expenses
• 5 of the best tools for small business expense tracking
• Final tips: Expense tracking for small business owners

What are the benefits of small business expense tracking? 

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. Plus, there are lots of great ideas for creative tax deductions for small business. 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 your short- and long-term business financial goals. In the short term, you’ll know how much money is coming in and out each month to be able to pay yourself and your employees or contractors.

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.

3 tips for accurately tracking business 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. 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 expense 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

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. 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

5 of the best tools for small business expense tracking

One of the best ways to simplify your accounting is to find the best software that includes expense tracking features you need. Below, we’ve put together our research into five of the best business expense tracker apps. As you review each, keep in mind your specific needs. 

Independent business owners may need a more holistic solution to business management and accounting, while bigger businesses may need features that enable expense tracking for employees, automated bookkeeping, and more. 

1. HoneyBook

HoneyBook offers more than financial tracking for independent businesses. It’s a clientflow management platform that lets you manage everything from capturing new business to booking and maintaining client relationships. Some of HoneyBook’s core features include invoicing and online payment processing. 

With a QuickBooks integration, that means you can track all your revenue in one place along with expenses and funnel all of your data seamlessly into QuickBooks for more automated bookkeeping.

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.

2. Brex

Brex is an expense management platform built specifically for corporate businesses. It includes features like business credit cards, reimbursements, bill pay, global expenses, and travel. 

For larger companies, Brex also incorporates automation and AI to streamline the entire process of tracking, tagging, and organizing expenses. It provides an easy process for submitting expenses as well as approving expenses for business owners and managers. 

Overall, Brex might not be the best option for independent business owners, but if you operate a franchise or manage many employees, it can help you streamline your expense tracking and bookkeeping. 

3. QuickBooks

If you already have a business management platform and are just looking for somewhere to manage bookkeeping and accounting, QuickBooks is one of the top options. Keep in mind that QuickBooks integrates with HoneyBook, so using both can give you the best of everything–client management, payments, expenses, and financial tracking. 

If you use QuickBooks alone, you won’t get as much clientflow customization. But, you’ll be able to use QuickBooks invoicing, enhanced financial reports, and expense tracking. 

4. MileIQ

MileIQ is great for small businesses to specifically track their mileage and associated expenses. Though it doesn’t offer comprehensive expense tracking like Brex or QuickBooks, it’s an expense tracking app that lets independents accurately track one of their biggest expeses for tax season. 

Business owners like photographers, event planners, realtors, and more love the simple pricing and mobile app to track mileage in real time whenever you’re on the go. 

MileIQ is a great solution for simplifying one aspect of expense tracking. But, keep in mind that it doesn’t offer any other robust features, like invoicing, payment processing, client management, or other bookkeeping features. 

5. Freshbooks

Freshbooks is similar to QuickBooks as a comprehensive accounting platform. But, it’s designed a bit more for independent business owners and freelancers. Compared to QuickBooks and other platforms, Freshbooks is easy to set up and get started with quickly. 

You can count on using essential accounting features inside Freshbooks, such as expense tracking, bill and receipt scanning, project profitabiliy, invoicing, online payments, and more. 

Like QuickBooks though, keep in mind that Freshbooks doesn’t have everything you need to manage your clientflow, like lead capture, online contracts, and client communication. For that, you’ll want a clientflow platform. 

Final tips: expense tracking for small business owners

The bottom line: you need an organized system for tracking your business expenses, but it’s up to you to find the best system for your business. 

If it means starting with a spreadsheet, that’s fine, but considering expense tracking software can also help you save time and start to save your data for more long-term financial decisions. 

As you set up your process, I recommend leveraging free trials so you can explore each tool and how it works. Features are important, but you also want something that’s easy to use.