How to Track Business Expenses and Protect Your Profit

As an entrepreneur, you probably already have a solid budget in place. But does everything always add up at the end of the day? Is your burn rate way higher than it should be?

If that’s the case, you’re probably losing money to unplanned business expenses.

This article shares essential tips and best practices for small business expense tracking and accounting. We’ll start by identifying the possible culprits for expense creep, such as:

• Petty cash withdrawals
• Unused software/service subscriptions
• Travel costs
• Underutilized leases
• Machine repairs
• Incidental fees and charges

Keep reading and learn how to track business spending and protect business profit.

How Untracked Costs Shrink Your Income

Untracked costs are silent drains that suck profit out of your business. Like a drop leak in a pipe, these expenses are small (almost negligible) and unseen. But over time, those insignificant drops can result in thousands of gallons of wasted water.

The small business expenses you never worry about can seriously eat away at your earnings. Let’s investigate how you might be losing thousands of dollars every month, only a few pennies at a time.

The Slow Leaks in Your Cash Flow

Costs directly linked to production are generally easy to track. These are your labor, material, leases, and utilities costs. Most businesses have such expenses figured out and well documented—rarely any surprises there.

However, some expenses slip through the cracks or are ignored. These are the types of expenses that never make it to the books. The ones that leave you wondering why your business is losing money.

We’ve rounded up some common overheads that many small businesses seldom track or are oblivious to. Any of these is a likely suspect for stealing your profits:

• Petty cash withdrawals

It’s not uncommon or inherently wrong to occasionally take money from the petty cash fund. It’s there to pay for minor expenses, things like basic office supplies, coffee runs, and snacks for meetings.

However, petty cash withdrawals can get out of hand. This happens when the withdrawals are not properly regulated and documented. With little or no oversight, occasional petty payments can quickly add up over time.

• Machinery repairs

Major machinery repairs are generally hard to ignore. But minor repairs can seem too “cheap” to matter. For example, it might be tempting to sweep a five-minute $20 printer repair under the rug. And yes, $20 probably isn’t a lot. But do that time and again, and you’re suddenly looking at hundreds of dollars’ worth of untracked repairs.

• Unused software subscriptions

Did you know that the average small business spends $4,500 per year on subscriptions? And that’s just on Software as a Service (SaaS) products. That’s not necessarily a bad thing, but only if the subscriptions are worthwhile. And that’s not always the case.

Subscriptions can get out of control and become needlessly expensive. There’s even a word for it: “subscription sprawl.” You may be paying for services and products you don’t really need or even know about. Maybe you or an employee tried out a service, didn’t like it, but then forgot to cancel.

• Unnecessary leases

Just like with unwanted subscriptions, you might be paying for property leases you don’t really need. It could be an underutilized office space, warehouse, parking space, or piece of equipment. You may not even know that someone somewhere is charging you for assets you never use.

• Late fees and rush charges

Incidental costs like parking tickets, surcharges, cash withdrawal fees, and late payment penalties probably don’t happen very often. But not many people track them when they do happen. And that may be just another leak in your cash flow.

• Travel costs

Traveling is another hidden cost in many small businesses. It’s very likely to ignore or forget to factor in travel expenses when moving around for work. Even short to-and-fro lunch trips can be really costly.

And travelling is not just about mileage. It takes time to move from place to place. So, any minute spent on the road is valuable time you’re actually paying for.

RELATED ARTICLE — 8 Reasons You Need a Small Business Expense Tracker

How Untracked Costs Add Up

Surely, an occasional parking ticket or road trip probably won’t dent your monthly bottom line. But what happens when your business incurs a bunch of these “petty” expenses on a regular basis? That’s how a drop becomes a trickle and eventually a flood.

Here’s a scenario for you.

Assume you’re a mobile hairstylist, driving from client to client. On this particular day, you drive 40 miles for a quick wash-and-straighten job and get paid $150.

The 40-mile round trip sets you back $30 in gas money. You also pay an additional $15 to park your car. That’s a total expenditure of $45.

But after returning home, you realize that you left some of your supplies at the client’s place. So, you drive back and spend another $45 on the trip. Now, since this $45 is not directly related to the wash-and-straighten job, it doesn’t occur to you to add it to the expenses.

When doing your books, you fail to capture that miscellaneous $45 expense. In other words, you’ve lost $45 to untracked expenses. A job that should have netted $105 earns you $60 instead. But the books incorrectly say you’ve made $105.

Now imagine if something like this happens a couple of times every month. Maybe you’ve bought some extra bottles of shampoo that you never use. Or you’ve had your car impounded for illegal parking. Those expenses will quickly add up.

The trick to sealing these leaks is tracking every single expense. Regardless of how small or obscure, put every spending in your books. That’s the only way you can get a clear picture of your business’s financial performance.

How to Capture Costs at the Point of Purchase

Incidental or unplanned expenses can be difficult to capture using traditional bookkeeping practices. The “I’ll deal with it later”  approach simply won’t work. So, it’s often easier to record such expenses as soon as they occur. Whether it’s at the gas pump, restaurant, or checkout lane, that’s the best time to record unexpected spending.

Most of the expenses that slip through the cracks occur outside the conventional workplace. And in many cases, they don’t fall neatly into any of your predefined expense categories.

However, there are still ways you can reliably capture unplanned business spending.

Write Detailed Notes

Immediately after paying for anything business-related, put it down on paper. Some expenses go undocumented simply because there’s no paper trail. For example, you may not get a receipt at the coffee shop or newsstand.

Take it upon yourself to record these random transactions. Keep something like an expense journal, either a physical or digital notebook. In it, record business expenditure in your own words throughout the day. This might come especially handy if you’re a travelling tradesperson.

Take Photos of Receipts

Some unplanned payments do come with paper receipts. But that doesn’t make them any easier to track. In fact, you might argue that receipts are even harder to track. Let’s be honest, paper receipts usually end up in a crumpled mess at the bottom of a glovebox or a desk drawer, never to be seen again.

Luckily, there’s a simple way around this problem. Every time you get a receipt (paper or digital), take a picture of it with your phone. Then keep the photo in a dedicated gallery for easy retrieval.

You can even take this mobile recordkeeping approach one step further. Some mobile apps can make expense entries from pictures of receipts. Invoice Simple, for example, has a feature that scans images of receipts and captures expense details. Simply point your smartphone at a receipt, and you’re done.

Try Invoice Simple for free and discover mobile business costs tracking made simple.

Create a Dedicated Account for Miscellaneous Expenses

Recording expenses on a notebook or smartphone only gets you halfway there. You must also figure out how to incorporate unplanned expenses into your bookkeeping system.

The easiest way to do this is by recording the expenses in a dedicated account. Most accounting systems accommodate miscellaneous expense entries.

RELATED ARTICLE — How to Keep Up with Receipts for Your Business: 8 Best Ways

Knowing Your True Overhead: Are You Actually Profitable?

The number in your bottom line does not always represent net profit. If you don’t know how much your business actually spends, then you can’t be sure about the profits either. You may have a good net profit margin on goods and services. But it’s the overhead burden you need to worry about.

If you don’t track all your expenses, you can never know your true profit margin. As a business owner, you should know exactly how much it costs to open your door or get in your vehicle every morning. Otherwise, you’ll be lying to yourself about how much money you make.

And that’s a dangerous lie too.

False numbers will misrepresent your business’s fiscal health. You may end up making some ill-informed business decisions that come back to bite you.

The table below summarizes all the expenses you should be constantly tracking.

RELATED ARTICLE — Operating Costs: Definition, Formula, and Examples

Categorize Expenses for Clarity, Not Just for Taxes

Some entrepreneurs only care about expenses come tax season. However, recording and categorizing business expenses just for tax purposes is the wrong idea. Sure, if you get the numbers right on your tax-deductible expenses, you may catch some much-needed tax breaks. But tracking expenses continuously does so much more in terms of being organized and productive.

In addition to IRS compliance, here are five reasons to stay on top of business spending.

Gain Insights into Your Business’s Spending Habits

Recording and categorizing expenses helps you track your outgoings. You get a clearer picture of where and how your business spends money. This visibility into your cash flow tells you whether you’re spending too much relative to your income.

Discover Ways to Cut Costs

Is your business spending too much?

If it is, you can find ways to cut back by analyzing your spending patterns. With well-documented spending, you can easily pinpoint expense creep or things you could do without.

And it’s not just about cutting costs either. Cleaning up your cash flow makes your business more efficient, agile, and resilient.

Money is always tight when running a small business. According to a recent report, about 75% of small businesses have fewer than three months of cash available. So, the less you have to pay for, the longer you can keep going, even when revenue slows.

Improve Financial Planning and Budgeting

Knowing how and where you’re spending money puts you in a position to make sound financial decisions. For starters, budgeting becomes easier, predictable, and accurate. You can even forecast business finances months into the future. This is called financial intelligence.

Prevent Fraud

Tracking expenditures is an effective solution against fraud and mismanagement. Monitoring outgoings closely may expose unauthorized or fraudulent transactions. It could catch an employee’s squandering of business funds or something more serious.

Also, tracking expenses instills a sense of accountability in the workplace. Your employees and even yourself become more mindful about how every penny is spent. That financial consciousness bleeds into cost saving and business efficiency.

Separate Business and Personal Finances

It’s pretty common for contractors, freelancers, and sole proprietors to mix their business and personal finances. This is wrong for a number of reasons. One, it blurs your view of business performance. Two, it makes tax compliance a headache. And three, mixing funds removes the protective shield between your personal assets and business liabilities.

Monitoring business expenses helps you avoid this comingling. It becomes easier to distinguish between business and personal expenditures and handle each account appropriately.

Turning Expense Data into Smarter Pricing

Expense tracking can provide valuable insights into your pricing strategy. Checking your true costs against revenue may reveal whether you’re underselling your products or services. From there, you can figure out the ideal markup and margin for a healthy income.

This does not necessarily mean increasing the price. Depending on what you offer, there might be other clever ways to earn more without raising prices. It’s about coming up with a smart pricing strategy to put more cash in your pocket. You can do that in the following ways:

• Bundle services to increase the total order value.
• Create tiered pricing and packages.
• Add surcharges to cover fees and special requests.
• Define terms for reimbursable expenses, such as travel and permit costs.
• Penalize clients for late cancellations.
• Set minimum order sizes to improve cost efficiency.
• Re-evaluate and shift your value proposition.
• Upsell and cross-sell to new and existing customers.
• Rethink how you offer discounts and handle price negotiations.