Find the Best Way to Track Business Expenses

May 12, 2023

Effective expense tracking is essential for managing a successful business. By keeping track of your expenses, you can maintain financial control, observe cash flow and profitability, and make informed decisions for your business. In this article, we've put together a guide that will provide you with the necessary steps to accurately and effectively keep track of your business expenses.

Understanding Business Expenses

Understanding what counts as a business expense is crucial before you start tracking expenses. Business expenses cover costs for operating and maintaining a business, including office rent, utilities, travel, equipment, supplies, advertising, and salaries. These costs may be tax-deductible and can be fixed (e.g., rent) or variable (e.g., marketing costs). It’s important to differentiate between the cost of goods sold (COGS) and general operating expenses. COGS covers expenses associated with producing a product or service, while general operating expenses are incurred outside the production process. Proper categorization of expenses is vital for managing cash flow and generating accurate financial statements to inform decision-making for budgeting, cost savings, and growth strategies.

Which Expenses to Track

To keep track of your business expenses accurately, you need to identify and record all the expenses you incur. These expenses can be categorized into two main types: fixed expenses and variable expenses. Fixed expenses are costs that remain constant, such as rent, loan payments, and insurance premiums. Variable expenses, on the other hand, are costs that change from month to month, such as office supplies, utilities, and travel expenses. By tracking both fixed and variable expenses, you can monitor your spending habits accurately and identify areas where you can reduce costs.

The Importance of Tracking Expenses

Tracking your business expenses is essential for several reasons. Firstly, accurate expense tracking helps you understand your financial situation and avoid overspending. Secondly, it enables you to analyze your spending habits and identify cost-saving opportunities. Thirdly, expense tracking provides you with the necessary information to create an accurate income statement, which is essential for tax purposes. Additionally, maintaining accurate records also helps you manage your personal finances more efficiently.

Business Expenses | How-To

Effectively tracking your business expenses is crucial to managing your finances and making informed business decisions. There are several steps you can take to ensure your expenses are accurately recorded and organized. By following these steps, you can effectively track your business expenses and gain greater control over your finances.

#1: Acquire a Business Bank Account

When it comes to effectively tracking your business expenses, one of the most important steps is to open a business bank account. If you're starting a new business, it's crucial to have a clear financial boundary between your personal and business finances. By opening a separate business bank account, you'll be able to keep track of your business expenses more effectively.

By using your business bank account for all of your business transactions, you'll simplify your record-keeping and be able to get a clearer picture of your business's financial situation. Separating your personal and business transactions will also make things easier when it comes to filing your taxes.

Overall, opening a business bank account is a crucial first step for any business owner who wants to track their expenses properly. By doing so, you'll be able to establish a clear financial boundary, simplify your record-keeping, and gain greater control over your business's finances.

#2: Use an Accounting System That Works (such as Lunafi)

There are two primary types of accounting systems that businesses use: cash accounting and accrual accounting. Understanding the differences between them will help you choose the best option for your business needs (which we explain in the step #3).

Another important concept to consider when choosing an accounting system is bookkeeping. There are two primary bookkeeping methods: single-entry and double-entry. Single-entry bookkeeping is a simple approach where each transaction is recorded once as either an income or expense. 

#3: Cash or Accrual Accounting

Cash accounting is a straightforward method of accounting where income and expenses are recorded when cash is received or paid. For example, if you sell a product and receive payment immediately, you would record the income right away under cash accounting. This method is ideal for freelancers with simple finances, as it's easy to understand and requires less paperwork.

On the other hand, accrual accounting is a more complicated method of accounting that records transactions when they occur, regardless of when cash changes hands. For instance, if you sell a product, but the payment isn't received until later, you would still record the sale under accrual accounting. This method provides a more accurate representation of your business's financial position, as it takes into account all transactions regardless of whether payment has been received or not.

Both methods have their benefits and downsides. Cash accounting is simple and easy to understand, but it doesn't provide a comprehensive view of your business's financial health. It also isn't suitable for businesses with delayed profitability, such as those that invoice clients and receive payments later. Accrual accounting, on the other hand, provides an accurate picture of your business's financial position and is ideal for businesses with delayed profitability. However, accrual accounting is more complex and requires more paperwork.

When it comes to recording income and expenses, cash accounting records income and expenses when cash is either received or paid. Accrual accounting, on the other hand, records income and expenses when a transaction occurs, regardless of when cash changes hands.

To choose between the two methods, consider your business's needs and financial situation. If your business has simple finances and doesn't have delayed profitability, cash accounting may be sufficient. However, if you have delayed profitability or more complex finances, accrual accounting may be necessary for providing an accurate picture of your financial situation.

#4: Ensure Connectivity Between Your Financial Institutions

In order to effectively track and manage business expenses, it is crucial to connect your financial institutions, such as your bank accounts and credit cards, with your accounting software

By connecting your financial institutions with your accounting software, you can integrate all of your banking transactions into one place, eliminating the need to manually input every individual transaction. This saves time and ensures accurate income and expense records.

Lunafi offers a wide range of features for freelancers and self-employed individuals, including invoicing, accounting, and expense management tools.

Once you have connected your bank accounts and credit cards to your accounting software, you can complete banking transactions directly on the platform without the need to log into your bank account separately.

#5: Manage Your Receipts Effectively

Keeping track of business expenses requires effective receipt management. Properly managing your receipts is crucial to ensure that you don't miss any tax deductions, overspend on business expenses, or have trouble with reimbursements. Follow these best practices to keep track of your receipts effectively:

Digitize Receipts

The first step towards effective receipt management is to digitize your receipts. Take a clear photo of the entire receipt or scan it, and store it digitally in your expense tracking application or computer. This way, you can easily access the receipt whenever you need it, without the hassle of searching for misplaced paper receipts.

Attach Receipts

Consider investing in an application that allows you to attach receipts to business invoices. These expense-tracker apps can simplify the process of creating reimbursable expense reports, saving you time and reducing the potential for errors.

#6: Record Expenses Promptly

Recording all of your business expenses is a critical step towards tracking your business finances and meeting your financial goals. Neglecting to record expenses in a timely manner can lead to errors in financial reporting, overspending, and inaccuracy in forecasting expenses. Follow these best practices to keep your expenses accurately recorded:

Import or Manually Enter Transactions

There are two primary ways to record expenses: importing transactions automatically through accounting software, and manually entering them. Regardless of which method you choose, it's essential that you record your expenses regularly and promptly. This will help ensure that your records are accurate, up-to-date, and reflective of your current financial situation.

Set Up Reminders and Develop a Routine

To stay on top of your expenses, it helps to set up reminders and develop a routine to record them on a regular basis. Try to record your expenses daily or weekly, so that you don't miss any entry and avoid overwhelming yourself with a backlog of expenses.

Complete a Monthly Bank Reconciliation

Performing a monthly bank reconciliation is a necessary measure to verify the accuracy of all transactions.Reconciliation involves comparing your bank statements to your accounting records to identify any discrepancies or errors. This process can help you detect fraudulent activities, and it allows you to address issues before they become bigger problems.

#7: Consider Using Lunafi

Using the Lunafi app can not only help you save time but also improve your accuracy in recording and categorizing expenses, minimizing the risk of errors. With the Lunafi app, you can track travel expenses, meals and entertainment expenses, and other related business expenses on-the-go, while still maintaining accurate records. For this reason, the Lunafi app is one of the best ways to track your business expenses.

So, Should I Use an Accounting Software?

As a freelancer, you may often find yourself overwhelmed with the amount of financial data you have to manage and keep track of. Fortunately, accounting software can be a great tool for simplifying this process.

One of the biggest advantages of using accounting software for tracking your business expenses is the automation it provides. Once you input your data, the software will automatically categorize and organize it for you. This can save you a significant amount of time and effort compared to manually recording each individual expense.

Another benefit of using accounting software is the ease of organization it provides. With all your financial data in one place, you can easily track expenses, generate reports, and make informed financial decisions. Additionally, you can quickly pull up past records and view your company's spending over time. Try the Lunafi app today and start reaping the benefits of our easy-to-use accounting software.

Always Track Your Business Expenses

Effective management of business expenses is crucial for achieving success in business. Not only does close and real-time tracking lets you know exactly where your money is going, but it also provides several benefits that impact your business in more ways than one. For instance, keeping a sharp eye on your expenses can help you stay on top of your budgets and profitability. By knowing where your money goes, you can ensure that you don't exceed your budget and maintain healthy revenue.

Another significant benefit of tracking expenses is the potential to keep your tax bill down. Recording your expenses regularly and correctly allows you to claim every deduction and tax credit available to your business. By taking these steps, you can reduce your taxable income, and ultimately, lower the amount of income tax you must pay.

Regularly tracking expenses also helps provide a better understanding of all your costs, which can ultimately lead to making better financial decisions for your business. It gives you an accurate measure of your financial situation and allows you to analyze spending patterns and identify areas where you can be more cost-effective.

Conclusively, closely monitoring your expenses in real-time offers various advantages to your business.It lets you stay on top of your budgets and profitability, keeps your tax bill down, makes reimbursement easier, and provides a better understanding of all your costs. So, make sure to keep a record of all your business expenses, claim every deduction, and make better financial decisions that positively impact the success of your business.

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