Expense tracking usually refers to tracking business expenses, e.g., office supplies, rent, utilities, etc., as opposed to personal expenses, such as bus fares, buying lunch, etc. The tracking is usually supported with detailed expense reports.
Why Is Expense Tracking Important?
Tracking expenses plays an important role in maintaining a healthy business. Here are some of the main reasons why expense tracking makes a huge difference.
Creating a Budget
Companies usually hire a dedicated finance team or use project management software to create budgets. Either way, expense tracking plays a vital role in the process.
When companies keep records of how much money they are generating versus how much they are spending, they can better understand their profits and losses. This helps them manage existing budgets and work on creating new ones by making data-based predictions.
Businesses of all spheres and industries can manage to save money thanks to tax deductions. In tax season, companies are legally required to prepare their taxes with all expenditures for that fiscal year and submit them to the IRS.
When a company has its every expense categorized with receipts or another expense tracking method for the fiscal year, it can benefit from tax deductions, as many business expenses are actually tax deductible. This can often result in saving a solid amount of money.
When companies track their expenses, they can calculate their business profitability. This is done with the use of a simple formula – revenue minus expenses.
Company owners and CEOs can give potential investors an idea of the company’s profitability and paint a clear picture of how the business is performing. Moreover, companies that have accurate records of their expenses won’t have to rely on guesswork to offer stakeholders a detailed view of their business strategy and forecast.
Tracking Business Expenses
Businesses are often unaware of how much they spend on various expenses. Things that may go under the radar include credit card rates, bank fees, interest rates, and debts for delayed payments.
These expenses might not be large when looked at separately, but if they keep piling up day by day, they can rack up to a substantial sum and turn into a financial headache if the company is unable to cover those expenses without a significant impact on its revenue. When companies track every expense on time, they can stay on top of things and avoid such stressful scenarios.
Moreover, when businesses track expenses, they can determine which expenses are eligible for tax deductions during tax season (e.g., supplies, meals, internet expenses, etc.). Tax deductions are applied to a company’s taxable income or gross income to lower the overall tax rate the company has to pay.
Types of Business Expenses
There are many categories of business expenses, but the following are the standard types that can branch out depending on the circumstances and enterprises in question.
Fixed expenses are expenses that don’t change during a payment cycle. Companies that have to pay fixed expenses know how much they have to pay for a certain period of time upfront.
Fixed expenses may include mortgage payments, depreciation, insurance, payroll, or office rent. It’s worth mentioning that these expenses are temporarily fixed and might be liable to changes when the duration of the lease, contract, or agreement expires.
Variable expenses are similar to fixed expenses, except that their total cost will differ with every billing cycle. Companies that have to pay variable expenses can make educated guesses on how much they have to pay.
Variable expenses may include monthly utilities such as gas, water, internet, and electricity and inventory expenses such as office supplies, commissions, and credit card fees.
Period expenses can be variable or fixed, but they’re paid at regular intervals instead of per transaction.
Some examples of fixed period expenses could be office rent or mortgage, while variable period expenses can be office utility expenses and insurance.
Interest expenses can also be fixed and variable, as many interest costs are connected to period costs. For example, credit card purchases for employees on the road can be per transaction, but other interest expenses for different types of loans can fall under period costs (both variable and fixed).
Interest expenses are a whole expense category on their own as they allow companies to know exactly how much money they are losing from interest by borrowing from their overall budgets.
Can You Track Expenses With Dedicated Software?
One of the most modern methods companies use to stay on top of expense tracking is by implementing dedicated expense tracking software or other types of time tracking software with expense tracking features.
The software displays the expense data in a way that allows managers or CEOs to quickly search, analyze, and review the expense data in real time and determine the business' financial situation. Moreover, employees can create detailed expense reports via the software and submit them to the managers for review.