How To Keep Track of Business Expenses - 3 Simple Steps (With Examples)

“How do I keep track of business expenses?” is a crucial question for any entrepreneur or business owner, especially when starting out as a small business. Proper expense management not only helps in maintaining detailed financial records but also assists in tax return preparation, ensuring compliance, and optimizing business operations for better profitability.

Here, we outline three steps that will help you efficiently monitor your business expenditures. But first, let’s define what a business expense is.

What Is a Business Expense?

Business expenses are the costs involved in the daily operation of your business. These expenses can be categorized into various types.

Four Categories of Business Expenses

There are four main categories of business expenses that you should keep detailed records of and manage effectively. Here are the four categories and their examples.

• Fixed Expenses: These costs do not change with business performance and are essential for running the business, such as rent, salaries, and insurance.
• Variable Expenses: These vary directly with the level of production or business activity, like raw materials and marketing costs.
• Operational Expenses: Daily operational costs, including utilities, repairs, and office supplies.
• Non-Cash Expenses: Expenses like depreciation and amortization or capitalized expenses, and so on, reflect the gradual loss of value in assets over time without direct cash outflow. For example, depreciation of a company car, the value of which goes down as miles are put on it or amortization of intangible assets like patents, as the patent becomes less relevant as technology changes.

Did You Know? In Japan and other parts of Asia, it's common for business entertainment expenses to include karaoke after formal meetings.

Three Main Benefits of Tracking Business Expenses

There are three main benefits of tracking business expenses properly. Tax deductions, better financial decision-making, and fraud prevention.

1. Tax Deductions

Tax deductions are the first benefit of tracking business expenses. By maintaining thorough records of expenses, businesses can maximize their eligible tax deductions in the relevant tax year, reducing overall taxable income.

Examples of Tax-Deductible Business Expenses

Authorities often scrutinize such business expenses and ensure they are justified as ordinary and necessary for a business purpose to qualify as a tax deduction.

• Travel and Meals: Costs related to business travel and meals with clients are partially deductible and can reduce taxable income. However, such deductions are often scrutinized and must be justified as ordinary and necessary for business operations.
• Office Expenses: Purchases like office supplies and furniture that are necessary for business operations are typically deductible. To qualify, these items must be used solely for business purposes.
• Professional Services: Fees for services like accounting, legal advice, or consulting used for business purposes are deductible expenses. These must be directly related to the running of the business.

2. Better Decision Making

The second benefit of tracking business expenses is to obtain detailed insights into where money is spent and what the outcomes may be.

Impact of Tracking Business Expenses on Decision-Making

Effective tracking of business expenses provides valuable insights into financial management, enabling strategic adjustments in spending and investment to optimize overall business performance.

• Budget Optimization: Regular expense monitoring helps identify areas where spending can be cut or needs to be increased, allowing for more effective budget forecasting.
• Cash Flow Insights: Detailed records provide a clearer picture of how money is moving, aiding in cash flow management.

3. Financial Security

The third main benefit of tracking expenses is to ensure your business finances are compliant and to prevent fraud.

Fraud and Compliance

Maintaining rigorous oversight of business expenses is crucial for detecting fraud and ensuring compliance with financial regulations, thus safeguarding the company's assets and reputation.

• Fraud Detection: Regular reviews of expense reports can quickly uncover anomalies or suspicious patterns, enabling timely interventions to prevent potential fraud. For example, if an employee is secretly expensing personal dinners on your business’ expenses, you can look for evidence of this in your well-kept records.
• Regulatory Compliance: Accurate and organized records are crucial for compliance with tax laws and accounting standards, helping avoid legal penalties and fines.

Business Expense Definitions Across Regions

In different regions, tax authorities have specific criteria for what constitutes a deductible business expense:

• Hong Kong: The Inland Revenue Department allows deductions for expenses incurred in producing chargeable profits. Entertainment or personal expenses are not deductible.
• Singapore: The Inland Revenue Authority of Singapore permits deductions for expenses directly related to the production of income. Non-capital and unreimbursed expenses can be claimed.
• United Kingdom: HM Revenue and Customs specify that expenses must be wholly and exclusively for the purpose of the business to be deductible. This excludes any dual-purpose expenses that might have a personal component.
• United States: The Internal Revenue Service requires that business expenses must be both "ordinary and necessary." Entertainment expenses are no longer deductible, but meals provided to employees on the business premises are 50% deductible.

How to Track Business Expenses

Step 1: Use a Business Account

Separating your personal finances from your business transactions is essential for clarity and simplifies accounting processes. It also allows you to deduct business expenses, which is the most common reason people track business expenses.

Ideally, you should choose a business account that offers seamless integration with your accounting software, has competitive fee structures, and has additional benefits such as overdraft facilities and rewards programs.

Examples of Business Accounts:

• DBS Business Bank Account: DBS is a major bank in Singapore and a prominent player in Asia. DBS offers business banking solutions that include easy online banking, integration with accounting software like QuickBooks, and specialized services for startups and SMEs.
• HSBC Business Bank Account: HSBC is a global bank with a strong presence in Hong Kong, and HSBC offers comprehensive business accounts that include features like multi-currency accounts, extensive ATM network access, and integration capabilities with various accounting software platforms.

Did you know? A business account functions similarly to a business bank account for the end user—the difference is primarily how authorities categorize them.

Step 2: Select Accounting Setup

Choosing the right accounting setup is crucial for any business owner. Modern platforms like QuickBooks and Xero handle not only basic bookkeeping but also offer advanced features such as automatic expense categorization, bank feed synchronization, and integration with other business systems, which streamline operations. These platforms help maintain accurate records throughout the tax year, ensuring that all deductions are maximized.

Note: While there is nothing wrong with using Excel to do one’s accounting manually, it’s highly recommended to use professional software.

When tailoring accounting software to fit your business's specific needs, consider custom features that reflect the nuances of your operations. This could include departmental accounting for businesses with multiple segments, managing multi-currency transactions for international dealings, and integrating with other software systems like CRM platforms or inventory management systems.

In selecting accounting software, prioritize user-friendly interfaces, scalability, and robust features that suit your business size and industry. QuickBooks is known for its ease of use, FreshBooks for invoicing, and Xero for its comprehensive cloud-based capabilities. Automating expense tracking by integrating software with banking and credit card feeds simplifies financial management, ensuring real-time, accurate categorization of transactions.

Step 3: Manage Receipts and Records

In today’s digital age, digitizing receipts is advised whenever possible. This approach not only reduces physical clutter but also simplifies and streamlines the process of integrating spending data into accounting software. This also ensures that no financial detail is overlooked.

Expert Insight - Jon Morgan

CEO of Venture Smarter, a business consulting firm that specializes in helping startups and small businesses scale and grow.

Daily Management of Receipts and Records

Tools like Expensify or Dext (Receipt Bank) allow you to scan and organize receipts using your smartphone, integrating this information directly with your accounting software. This automation not only saves time but also enhances data accuracy.

However, for those who continue to receive or prefer paper receipts, it’s important to establish a systematic method for their collection and storage. Regularly transferring these details into your digital system will ensure consistency and completeness of financial records.

Analyzing Expenses

Regularly analyzing your expenses is key to effective financial management. Conducting regular audits of your expenses helps to ensure accuracy and can uncover any irregularities or opportunities for cost savings, especially tax-deductible expenses. By reviewing your financial reports and expense patterns, you can make informed decisions that lead to better budgeting and more strategic business planning.

Using the analytics tools provided by your accounting software, assess how your expenses align with your budget and identify trends. For instance, if your analysis reveals a consistent overspending in certain categories, you might consider renegotiating supplier contracts or finding more cost-effective alternatives.

The Importance of Detailed Records of Expenses

Keeping detailed records of all financial transactions is not just a requirement but a necessity for audited businesses. This includes keeping digital copies of receipts and sales commission records, as well as tracking the depreciation of assets. An effective accounting system helps in categorizing expenses and income, aiding in precise financial reporting and expense management. These records help demonstrate compliance with legal standards and are invaluable during an audit or when assessing your company's financial health.

Tip: If you have employees, offer to formally train them on your business's expense policy and the proper procedure for recording and submitting their expenses.

Another reason to keep detailed records is to ensure there is a clear distinction between business expenses and personal expenses. You might accidentally use a personal card for a business expense, so you’ll have to make a reimbursement form for tax purposes, for example. When tax time comes, this expense will be recorded in a compliant manner for tax purposes.

This ensures that your records are beneficial when tax time comes, simplifying the process of preparing tax returns and reducing tax liability. For small business owners, using a separate business bank account is one of the most effective ways to track your business expenses and ensure that all expenses are tax deductible where applicable.

Conclusion

Tracking business expenses is essential for effective financial management. By setting up a dedicated business account, selecting appropriate accounting software, and managing receipts efficiently, you can maintain a clear overview of your financial health, ensure compliance, and potentially increase profitability.