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How to Track Expenses for Small Business Owners

Learn how to track expenses for your small business to organize your short- and long-term finances. Make better decisions to grow your business and have a better understanding of your cash flow for tax season and beyond!

Author Autumn Kyles smiling

We’re pulled in so many directions as Independent business owners, which leaves little time to learn how to track expenses for our small business needs. Not only are we the leaders and decision-makers of our brands, but we oftentimes find ourselves having to be the secretary, marketing agency, client manager, and more.

For most of us, the last role we want to take on or even understand is a bookkeeper.

I get it – accounting is overwhelming. In fact, you’re not alone, nearly half of businesses 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, and tracking expenses for 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 can do it all for you digitally. All you need is a basic understanding and some up-front setup.

Why is it important to track expenses?

We all know that tracking expenses is important, but we might not realize all the ways we need to use our expense reports. As a business owner, you’ll need your expense information for taxes as well as your year-end reports and 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, such as: 

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

Reporting your expenses accurately can help you yield bigger tax savings, making tax season overall less stressful and giving you a bigger return to count on.

Understanding and optimizing your cash flow

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

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 anything 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 so tracking them will show you if you’re truly making money.

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

In the long term, understanding your expenses can also 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.

1. Set up a business bank account

In order 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 term. 

Separate accounts will make it easier to do your taxes, hire employees, purchase resources for your business, and reduce your personal liability. 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 think about all the main categories of expenses that you need. 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 mark-up. 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 cost of goods sold expenses are merchant fees, commission fees, and transaction fees.
  • Marketing & Advertising – This expense is the cost to market your product. Some examples of this account are social media ads, branding costs, or website development.
  • Dues & Subscriptions – This account 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 & Wages – This account 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.

Your specific categories may include more or less, depending on what you need for your business. By mapping out these categories, it’ll be easier to track your expenses moving forward. Even if you plan on using expense-tracking software, setting up the categories will also make it work harder for you.

3. Invest in software that tracks your business expenses

Thankfully, we live in times where we can use expense tracker apps and user-friendly software instead of paper ledgers or even spreadsheets. As an Independent business owner overseeing your own account, an expense tracking app can make sure everything is covered and nothing slips through the cracks. 

Even better: investing in software that manages online invoices and payments as well as expense tracking. 

Utilizing a client management software for small businesses like HoneyBook will help you stay even more organized and clear administrative work off of your plate. 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 the 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 use my reports?” 

This is another reason why it’s so important to choose the best expense-tracking software. In addition to logging your expenses, you also need to make sure they’re categorized correctly and being put into easy-to-understand reports.

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 of expense tracking. Let’s say you’re a freelance artist developing a commission piece for a client. You’re currently using HoneyBook as your CRM so when that expense hits your account, you place it in the Dues & Subscription Account. 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 cost would be assigned to the Rent account. Pretty easy right?

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

Lastly, you purchase a work laptop and accessories so that would be placed into your Computer & 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&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 less expenses. This is the summary of all of your revenues less expenses which lets you know if your business is profitable or not.

Next steps for tracking your expenses

Now that you know the basics about 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!

  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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