How To Track Business Expenses in 6 Easy Steps

Jim Hearson | Content Strategist | June 14, 2024

As the idiom goes, you’ve got to spend money to make money. But to give your company a better chance of turning a profit at an acceptable margin, the CFO’s office needs to keep a close eye on where that money is being spent. Business expenses can include many costs such as office supplies, employee travel, meals or other entertainment, subscriptions to news or data sources, and employee training. These expenses can add up, so being able to track them accurately can save time and money that can be funneled into further growth. At the same time, automating routine tasks around expense management saves employees time, so the finance team can focus on more strategic work, managers can quickly approve or reject employee expense approvals, and employees can quickly file their expenses and get back to doing their jobs.

What Are Business Expenses?

Business expenses are the basic costs associated with running a company. These expenses are a critical component of financial statements, particularly the income statement where they are deducted from revenue as part of determining the net profit or loss for a specified period. Any list of what constitutes a business expense is long and varied, including salaries and benefits, rent, information technology, marketing, raw materials, insurance, and legal fees. Here, we’re more focused on everyday expenses that employees rack up, the kind of costs that employees file an expense report with their manager to get approval and repayment. A key consideration for a business expense is whether it can be deducted from revenue to reduce a company’s taxable income.

In the United States, the Internal Revenue Service uses the phrase “ordinary and necessary” when talking about applicable business expenses, and it’s a good rule of thumb in countries worldwide. That is, if costs are ordinary or usual for the industry that a company is in and are necessary for it to perform its key functions, they should be acceptable as business expenses.

Key Takeaways

  • Accurately tracking business expenses is imperative for all businesses, for cash flow monitoring, revenue reporting, supplier assessments, tax filing, and more.
  • Only “ordinary and necessary” costs have the potential to be tax deductible.
  • Monitoring spending throughout the year saves time during tax season and allows for quick action if costs rise.
  • The CFO’s office is critical in establishing policies around business expenses, including approvals and spending limits.
  • Financial applications can save employees considerable time and effort in submitting, approving, and processing expenses, as well as reducing human error.

Tracking Business Expenses Explained

Once CFOs establish what counts as a business expense, the next thing they need to do is keep track of them across key spending activities. Accurately tracking business expenses is critical for budgeting; for procurement activities, such as negotiating rates and discounts; for cash flow management; and for financial reporting and tax accounting. Tracking business expenses in a timely manner helps finance teams spot variances from the budget early, helping the company take necessary action. Such actions could be a tactical policy change, such as limiting business travel, or it could be finding a new, lower-cost provider of office supplies. Public companies that need to report earnings each quarter need timely tracking of business expenses to avoid surprising investors with lower profit and margins. All companies must keep close track of business expenses to avoid a cash crunch.

The CFO’s office plays a crucial role in establishing the policies around business expenses. For example, approvals are a critical element in tracking business expenses. Policy elements include spending limits beyond which an expense needs to be preapproved and what level of executive needs to approve these expenses. Finance teams must strike the right balance with business expense policies, making them rigorous enough to maintain control and provide the necessary information, but not so time-consuming and burdensome that following them saps employee productivity. Software can play a critical role in improving productivity for business expense approvals, giving finance the ability to build approval rules that automate routine approvals and create workflows for exceptions or suspicious expenses that warrant closer scrutiny.

Consolidated business expense tracking also is important because companies can gain major cost savings by purchasing certain goods through fewer providers, giving the company more leverage to get volume discounts. Accurate tracking of business expenses gives procurement departments the information they need to make these kind of volume deals.

Benefits of Tracking Expenses

The benefits of tracking business expenses fall into four key areas: budgeting, tax deductions, cash flow, and cost savings. We go into greater detail below.

Budgeting

Every company needs to be mindful of its budget, and closely tracking business expenses helps both in establishing and sticking to budgets. In the here and now, most team and department leads are held accountable for sticking to their budgets, and with regular tracking of expenses they can nip any overspending in the bud. With each passing budgeting cycle, financial planning and analysis (FP&A) teams can gain insight into spending patterns and adjust future budgets to more accurately reflect them. If, by tracking expenses, it becomes apparent that an expense is becoming too big a cost, a company can investigate lower-cost supplier options, or changes in policy. For instance, if employee travel costs are skyrocketing, the company would put a policy in place to require prior approval by an employee’s manager—or even the manager’s manager—before an employee can book travel.

Tax deductions

Another key reason companies need to keep close tabs on their necessary and ordinary business expenses is because most are tax deductible—that is, companies can subtract those expenses from their gross income, reducing the amount of local, regional, and federal taxes they pay on that income. Typically, tax deductions include wages and salaries, standard employee benefits, raw materials and other product inputs, rent on business properties, depreciation of business assets, advertising, transportation costs, travel expenses, training, office supplies, software, insurance premiums, interest expenses, bad debts, and even a variety of taxes themselves. That list could go on for days, and there can be variations in any given country. In the US, for example, 50% of the cost of employee meals while traveling is deductible.

Cash flow

Because cash flow is essential to a company’s financial health, finance teams in charge of cash management need accurate and timely business expense tracking. Their job is to closely monitor what money is coming in from the goods and services their companies sell and—more pertinent for this discussion—what money is going out. Expenses such as travel and entertainment—or T&E—for employees to engage with clients and get together with coworkers can add up to significant and highly variable cash outlay if the proper policies and expectations aren’t in place. As long as these expenses are tracked accurately, subtracted from similarly accurate inflows, then the CFO can be confident that the company won’t get caught short on cash needed to pay its bills and that its cash flow forecasts are a true reflection of the company’s current financial standing. By tracking business expenses when they occur, finance organizations can take immediate action—whether through cost cutting, increased borrowing, or other steps—to improve cash flow, if needed, rather than waiting until figures have been consolidated weeks or months down the line when it’s too late.

Cost savings

Related to the above, if a company knows exactly what it’s spending in close to real time, it can embrace more agile financial practices, seizing opportunities to seek lower-cost options, renegotiate contracts to gain volume discounts, or delay purchases when certain prices are rising. Accurately tracking business expenses as they happen also makes it easier to cut down on duplication, both unintended and fraudulent. For example, managers in different marketing units may have subscribed to different stock photo services, when they’d get a better deal consolidating their use with one provider.

6 Steps To Track Business Expenses

We can all agree that tracking business expenses is in companies’ best interests for a variety of reasons. But what are the building blocks CFOs need to piece together to experience the benefits of effective expense tracking?

1. Establish business accounts and banking relationships

Banking relationships, including with business credit card providers, provide a foundation for business expense tracking efforts. Integrating business credit cards with expense management systems means employee expenses charged on those cards can automatically populate the system, reducing errors and saving employees and finance teams time. Some ERP systems even embed banking services into the application, so procurement teams can access financing and payments directly in the application for B2B transactions. These banking companies also provide the revolving working capital funds needed to manage payables and receivables. Since the cash and data needed to manage business expenses all flow through these financial services providers, a strong, well-integrated collaboration pays big dividends. By establishing such banking relationships, companies may also find it easier to get loans for larger purchases to expand the business, buy specialized equipment, or fund a marketing campaign.

2. Keep track of receipts and invoices

Companies should track business receipts and invoices as they occur. By monitoring receipts and invoices, they can forecast cash needs and adjust their spending as needed, monitor expense policy compliance, respond to audits, comply with financial reporting regulations, and otherwise keep things relatively simple when tax season rolls around.

3. Choose an accounting system

Accounting software systems vary in size and scope, ranging from spreadsheets and rudimentary bookkeeping and tax software to sophisticated enterprise application suites. In general, large, multinational, and fast-growing companies will need financial applications embedded with advanced data reporting and analytics features that cover some or more of the following ground: manage accounts payable and receivable, integrate financial planning and budgeting, control cash outlays, automate routine finance tasks, and support cash forecasting—all while handling multiple currencies, rooting out duplication and fraud, and helping companies manage financial risk. Increasingly, these expense management systems will embed artificial intelligence into the application, supporting work such as entering and reconciling invoices and payments to improve accuracy. A cloud-based financial system typically is more scalable than an on-premises system, meaning it can respond to spikes in demand such as quarterly close or tax filings. It’s also generally easier to implement, update with new features, and integrate with inventory, supply chain, procurement, and other applications (especially when it’s part of a suite).

4. Integrate software with accounts

Using accounting software without connecting it to the company bank accounts is like owning a sports car but never taking it out on the open road: Sure, day-to-day life will be better than before, but you won’t get the full potential from the investment. The more systems and institutions that are linked, the more powerful the software will be. Most financial applications include safeguards to prevent nefarious usage. Why manually enter data when it can be automatically uploaded at set intervals? Why log in separately to a business bank account when the system can carry out transactions?

5. Decide between cash or accrual accounting

This isn’t actually that much of a choice, since larger businesses—including all publicly traded companies—have to use accrual accounting for expenses (and revenue). But it’s worth having a clear understanding of the two accounting approaches as it applies to expenses. They can be recorded either when they occur (the accrual accounting method) or when they have been paid for (the cash accounting method). These recordings can happen at the same time, such as when a company pays cash for production material from a wholesaler. But when credit cards, invoices, and purchase orders are involved, there’s a gap between when goods and services are rendered and paid for.

The simpler variety is cash accounting, where business expenses go in the books only when the money has been paid to the supplier. This kind of accounting system is easy to maintain and gives a very clear indication of how much money is in the bank at any given time, so startups and smaller businesses sometimes rely on it. However, it may not offer a true picture of the company’s financial situation—a company may rack up lots of expenses on credit while getting paid in cash for sales, so it looks flush when it’s not. That's why generally accepted accounting principles (GAAP) use accrual accounting.

Accrual accounting records transactions when they take place but before any money has changed hands. So, a restaurant would record the cost of buying ingredients (accounts payable) right away even if purchased on credit. This accounting method helps to avoid sudden financial spikes and trenches, resulting in a more accurate view of the company’s financial health. In the US, companies with less than $25 million in revenue can choose how they record expenses, but they need to be consistent and accurate. Companies with $25 million in revenue or more are required to use accrual accounting. Rules vary in different countries.

6. Regularly review business expenses

Accounting software can produce monthly and quarterly reports that provide insight into what is being spent and where, but they can also offer more real-time expense information. Each of these sets of analyses provides the opportunity to monitor expenses as they’re occurring and to start building the budget plan for the following year. For example, a CFO of a pharmaceutical company notices that the amount it spends on travel and entertainment expenses for its sales force has been heading upward for a number of months. The company can respond by renegotiating its preferred airline and hotel relationships, moving more sales meetings to videoconferencing, or creating new preapproval processes for big-ticket entertainment expenses.

Track All Your Business Financials in One Place: Oracle Fusion Cloud Accounting Hub

Oracle Fusion Cloud Accounting Hub, part of the Oracle Cloud Financials suite of applications, unifies and standardizes financial data from different source systems, including the ERP systems of other vendors. It lets companies simplify their financial processes, consistently enforce accounting policies, and meet multiple reporting requirements. With Oracle Financials, the insights gathered from the data recorded from all financial transactions can help to increase the accuracy of forecasting, support risk management and compliance, and inform decision-making. The platform, which accommodates multiple currencies and languages, lets companies automate more than 80% of their financial processes with continually evolving AI-driven analytics.

Oracle Financials is part of Oracle Fusion Cloud Enterprise Resource Planning (ERP), integrating procurement, project management, supply chain, and other capabilities. Recognized by analysts among the top ERP systems for both service-centric and product-centric enterprises, Oracle Cloud ERP is at the forefront of helping businesses gain a competitive advantage.

Tracking Business Expense FAQs

Which types of business expenses are tax deductible?
Costs that are ordinary and necessary for running a business are generally permitted as tax-deductible business costs. These costs include rent, salaries and benefits, heating and lighting, marketing, cost of goods sold, specialist equipment, extraordinary travel costs, and much more.

Which types of expenses aren’t tax deductible?
Not every business cost can be classified as ordinary and necessary and thus tax deductible. Everyday employee travel expenses such as commuting to and from the office are nondeductible. The rules vary based on geography.

Should you use accounting software to track business expenses?
It’s all but impossible for a business of any notable size to keep track of its business expenses without accounting software. Accounting software makes expense reporting more efficient and accurate at tax time; lets you track expenses during the year to spot changes and avoid a cash shortfall; and puts all your expenses in one place, which can help you analyze your cost trends and supplier charges and negotiate for volume discounts.

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