How to keep track of expenses

Woman keeping track of expenses

For small business owners, learning how to effectively manage your expenses is crucial to your business’s financial health. 

More than half of small business owners have experienced cash flow problems, and expenses are one of the biggest factors in your cash flow equation. The good news is, it is easy to implement efficient expense tracking to minimise such issues. 

Keeping track of expenses in an efficient, time-saving manner helps you save money, cut down on unnecessary costs, and improve your business’s financial health in the long run. Tracking expenses gives you a complete understanding of how you are spending your money, which ultimately helps you to make smarter business decisions.

In this article, you’ll learn about the different types of expenses and how to track them for your own business.

Table of contents

Types of business expenses

Expenses are costs incurred by your business in order to generate revenue.

These costs may include employee salaries, office rent, utility bills, the cost of machinery used in operating your business, advertising and marketing initiatives, and more.

There are three main types of business expenses.

1. Operating expenses

Operating expenses, or OPEX, are short-term expenses that a business incurs on a day-to-day basis.

These are divided into two broad categories:

  1. Selling, General, and Administrative expenses (SG&A)
  2. Cost of Goods Sold (COGS)

SG&A expenses are the non-production costs incurred by a company. These costs usually fall under a company’s overheads.

Examples of SG&A expenses include:

  • Advertising spend
  • Utility bills 
  • Telephone bills
  • Travelling expenses
  • Healthcare insurance 

COGS are directly related to the production level of a business. The more items a company produces, the higher its COGS would be.

Examples of COGS include:

  • Freight or shipping charges
  • Storage costs
  • Direct labour costs
  • Direct material costs

Both types of operating expenses are usually paid off in the same accounting period in which they’re incurred.

2. Non-operating expenses

Non-operating expenses are costs that aren’t related to the core operations of your business but are still incurred on a per-need basis.

Examples of non-operating expenses include:

  • Interest expenses
  • Loss on disposal of assets
  • Obsolete inventory charges
  • Lawsuit settlement expenses

Non-operating expenses may or may not apply to your small business depending on your specific situation.

3. Capital expenses

Capital expenses, or CAPEX, are costs incurred by a business to acquire, maintain, or improve its fixed assets.

Examples of CAPEX include:

  • Buildings
  • Machinery
  • Office equipment
  • Land
  • Vehicle

Capital expenses are largely incurred when a business undertakes a new project or invests in improving its processes and future output.

Quick Tip: Understanding small business accounting is a crucial part of mastering how to track and organise your business expenses. With a basic understanding, you’ll be able to make a more informed decision on the type of accounting method that works best for your business, as well as how to set up a healthy bookkeeping, accounting and invoicing system. To learn more, read our complete guide to small business accounting

The importance of tracking expenses

Knowing exactly how much money you’re spending every day and where you’re spending it helps you make better short and long-term financial decisions for your business.

Here are some key benefits of tracking your expenses.

1. Stick to a budget

Keeping track of expenses helps you stay within a specified business budget. If you don’t know how much money you’re spending or where you’re spending it, you won’t be able to tell if you’re overspending or spending it in the wrong place.

A business budget also helps you to identify unnecessary or excessive costs and take appropriate measures to adjust those spending habits before it’s too late. Further, a budget helps you to ensure you have enough money stored in an emergency fund at all times in case you run into a cash flow issue.  

An infographic describing the role of a business budget in achieving a business plan

Recording expenses gives you a pulse on exactly where and how you’re spending your money, helping you to become more conscious and strategic about your spending. 

2. Create accurate financial statements

Expenses are an important part of both the income and cash flow statements. Tracking them gives you a complete and accurate picture of your company’s financial health.

For example, you need to know the exact amount of expenses incurred to find out if your company made a profit or loss during a specified period of time.

Accurate financial reporting, whether monthly, quarterly or yearly, is key to making better business decisions. It helps you answer questions like:

  • Can you afford to buy another company vehicle?
  • Is organizing a company-wide retreat a good idea at this time?
  • Do you need to switch suppliers?

Plus, the more accurate your financial statements are, the more likely you’ll be to pay the right amount of tax. This leads us to the next point.

Quick Tip: There are three main financial statements: the balance sheet, income statement and cash flow statement. The more familiar you are with what each one means, how they work and how they relate to one another, the better accounting decisions you’ll be able to make. Of course, a dedicated bookkeeper or accountant can help you to create and analyse these statements as your business grows. To learn more, read our complete guide to accounting for startups

3. Pay the right amount of tax

Some expenses incurred by your business are tax deductible and can be claimed. These claims can effectively reduce the tax your company has to pay to HMRC.

Here are some examples of expenses that are tax deductible:

  • Marketing and advertising, such as website domain registration and hosting fees
  • Staff costs, such as salaries, bonuses, and commissions
  • Office costs, such as rent, utilities, and phone bills
  • Clothing expenses, such as uniform and safety gear required to do business

Quick Tip: To claim your business expenses, make sure you keep an accurate and auditable record of everything for up to six years. To dive deeper into what expenses you can claim, or subtract from your company’s income before they are subject to taxation, read our guide to expenses: what they are and how small businesses can manage them.

How to keep track of your expenses

Having a good system in place to track your business expenses helps you avoid confusion and hassle at the end of each accounting period.

There are several different ways to track your expenses, from manually writing entries in a ledger to using apps and software that automatically record transactions.

Here are five ways to keep track of your business expenses.

1. Open a dedicated business bank account

Even if you’re a sole proprietor or running a very small business, it’s a good idea to open a separate bank account for your company.

A business current account makes it easier to keep track of all of the money going out of your company. It also lets you separate your business expenses from personal expenses, which can be helpful during tax time. And it makes it easier to check your business vs. personal account balances, guaranteeing you don’t run into a problem where you have more or less money in your business or personal accounts than you thought. 

Ideally, all of your business transactions should be conducted through your business account. This will also help you effectively reconcile your bank statements with your books.

2. Decide how to record transactions

When setting up an accounting system for your business, you’ll need to decide how you want to record transactions.

There are two methods of recording business transactions:

  • Cash accounting
  • Accrual accounting

An infographic about choosing an account method - accrual method vs cash method

In the cash accounting method, you record revenue when cash is received and when expenses are paid. So, for example, if a client has yet to pay for the services you provided, you won’t record this transaction until they actually pay you.

This is a straightforward way to record transactions and can be done without any help from an accountant or a bookkeeper, as there are no account payables and receivables.

In the accrual accounting method, both revenue and expenses are recorded when they’re earned, not when they’re actually received or paid.

For example, if you’ve provided services to a client who has yet to pay you, you’ll still record the transaction in your books.

This method of recording transactions is a bit more complex and may require you to hire a professional. However, it provides a more accurate picture of your business’s financial health than cash accounting.

For freelancers and new businesses, cash accounting might make more sense. But if your business is growing and you frequently provide services to clients on credit, the accrual accounting method might be a better way to record transactions.

3. Create an expense spreadsheet

Once you’ve decided on a method, it’s time to start recording your transactions.

To keep things organised, you may want to create a spreadsheet as an expense tracker. You can also choose to record expenses by hand, but using a digital spreadsheet will save you plenty of time.

Use tools like Microsoft Excel or Google Sheets to easily create a spreadsheet for free.

If you’re not sure how to create one from scratch, we’ve done it for you. Here’s our free online expense spreadsheet template to get you started.

Tide's sample expense spreadsheet based on existing template.

Templates like the one above usually have pre-designed expense categories and formulas in place—all you need to do is type in your expenses as you incur them in the right columns.

It’s a good idea to use an online spreadsheet as it allows more than one person to record expenses at the same time.

4. Maintain a backup of your expenses

Regardless of how reliable you think your system is, there’s always a risk of something going wrong. You may face issues like missing entries, corrupt files and system errors. Someone may even accidentally delete important records.

To overcome any such potential issues, you should always keep a backup of your expense records. This could be a physical backup of receipts and contracts or a digital backup that includes photos of your receipts and other expense documents.

We recommend storing your backup data in a cloud-based folder, such as Google Drive, Dropbox, or OneDrive.

5. Invest in an accounting software

Manually recording each and every expense can be time-consuming, even if you’re using an online spreadsheet. 

A faster and money-saving alternative is to use a business finance platform that seamlessly integrates with your accounting software, like Tide, that automates the entire process of recording transactions as they occur in real-time.

Tide's business finance platform website homepage user interface

Tide is a mobile banking app that helps you conduct and record transactions on the go. Simply integrate it with your favourite accounting software, and keep track of your expenses as you incur them.

Using software to track expenses eliminates human error and saves you valuable time. Tide also auto-categorises your expenses so you can stay organised and up-to-date with your company’s transactions at all times.

While recording expenses in your Tide account, you can add notes and attachments with each transaction. This means you don’t need to keep an offline backup as all your data is automatically stored in one place.

Wrapping up

Keeping track of expenses can help you boost your company’s financial health. Not only does it help you save money, cut costs, help you to pay the right amount of tax, and prepare accurate financial statements, it drives you to make better decisions for the future of your business.

You can choose to track your expenses manually or invest in reliable accounting software to automate the entire process. Learn more about how Tide’s features can help you record transactions and keep track of expenses on the go so you can save time and get back to doing what you love.

Photo by Marcus Aurelius, published on Pexels

Shahree Zin

Partnerships Executive and small business accounting advocate

Tide Team

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