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How to Keep Track of Business Expenses: A Comprehensive Guide

As a small business owner, you're juggling a million tasks. It's easy to get bogged down in the day-to-day and lose sight of your big-picture goals. But tracking your business expenses is essential for making better financial decisions and boosting your bottom line.

This comprehensive guide will walk you through the best ways to track your business spending. You'll learn what expenses to track, how to categorize them, and how to use this information to improve your business performance.

If you’re not sure how to keep track of your business expenses, read on. This comprehensive guide will walk you through the best methods and tools to track your business spending, so you can reach your goals while still focusing on the day-to-day. 

What expenses should a small business track?

Business expenses are not personal expenses. That might seem obvious, but the difference can actually be blurrier than you might think, especially for small or single-person businesses. 

According to the IRS, business expenses must be ordinary and necessary to be deductible. “Ordinary” means the expense is common in your industry. For example, taking clients out to lunch is an ordinary and accepted sales practice. “Necessary” means the expense helps your business — it does not mean it's indispensable. That client lunch is not an indispensable expense but can be necessary if it helps you grow your business. 

Personal expenses — such as taking your family to lunch — are not ordinary or necessary, even if you pay for them with your business income. That’s why the IRS recommends keeping separate accounts for your personal and business expenses. 

Fixed vs. variable expenses

One way to help break down your business expenses is to separate them into fixed and variable costs. 

  • Fixed expenses are the same regardless of your sales volume, output, or growth. A few common examples include your rent, business loan payments, employee salaries, and utility payments. 

  • Variable expenses fluctuate based on the volume of business and other factors. Raw materials, hourly labor, repair costs, and sales commissions are all examples of variable costs. 

Fixed expenses can change in special situations but are generally consistent. Variable expenses, on the other hand, are tougher to predict and can throw off your budget if you don’t plan for them. Effective expense tracking has to account for both categories — if you’re only keeping track of fixed expenses, you’re missing a big chunk of your spending and could be hurting your budget.

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Why is it important to keep track of business expenses?

Tracking your business expenses goes beyond knowing what you can deduct from your taxes. It sets your business up for financial wellness, stability, and long-term growth. Here’s how detailed expense tracking will help you as a business owner:

Stay within your budget

Setting up a budget is crucial for all new businesses. According to a 2021 survey, just over half of new businesses have a formally documented budget. Those that don’t may struggle to measure their growth in the future. 

That said, setting up a formal budget isn’t the whole job. You also have to use that budget as a guideline and stick with it — that’s where business expense tracking comes in. 

Identify opportunities to cut costs

If you’re not tracking your business expenses, you might not see where small, seemingly harmless costs are starting to add up. Keeping a detailed record of your variable expenses will show you where you can save. For example, you can cut that weekly delivery fee by ordering larger deliveries once a month. 

Identify opportunities to invest

You can’t track your ROI without accurately tracking your business expenses. Which of your products or services delivers maximum profit for the cost? By keeping track of expenses, you can identify where your spending is most effective and adjust your budget accordingly. 

Get a clear picture of your financial health

Again, if you’re only planning for fixed costs, you might be missing areas where your business is losing money. Keeping track of even your smallest expenses will give you a comprehensive picture of your business’s financial health. 

Comply and get the most out of filing your taxes

Filing your business taxes doesn’t have to be complicated. Keep track of your business spending so you can comply with IRS guidelines and make sure you’re reporting every deductible expense. 

Support your accounting and bookkeeping needs

The methods we cover below will make things easier for your accounting or bookkeeping department — even if that department is just you. 

What is the best way to track expenses for a business?

There is no “best” way to track your business expenses. Every business has its own needs, and what works for you might not be “best” for someone else. However, there are a few tried-and-true methods we can recommend:

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There’s nothing wrong with the old-school pen-and-paper method of business accounting. Manually tracking expenses can work great for a single-person business or partnership. Just write down every expense in a spreadsheet or journal, then reference it when it’s time to file taxes, adjust your budget, or analyze your ROI (return on investment). 

The plus side of this method is that it’s simple. You don’t need to learn a new software program or pay for an app. The downside? Manual tracking is outdated for a reason — you won’t get the automation and sharing tools that come with other methods. As your business grows and your expenses get more complicated, you might want to consider other tools that take the process out of your hands. 

Using accounting software

In 2023, more than half of small business owners use accounting software. Software automates your expense tracking by storing digital receipts, keeping records, and running analyses. Depending on the software you use, you can also use it to create graphics and charts, which will help you visualize your budget and long-term growth.

A few of the most popular accounting software programs for small businesses include:

  • QuickBooks - Affordable and easy to use

  • Xero - Comes with a wide range of accounting features

  • Zoho Books - Offers a free plan

  • Sage Business Cloud Accounting - Offers a basic plan for micro businesses

The main benefit of accounting software is its convenience. These tools save you time and, for many business owners, can replace an accounting team. Software also reduces the risk of human error and can provide a clearer picture of your budget than a simple spreadsheet. 

The biggest downside is the cost. Most of these software programs aren’t free — however, if it saves you from the cost of hiring a professional accountant, it might be worth it. Another downside is that there are dozens of popular accounting software programs on the market today, so you’ll have to take some time, do your research, and choose the program that works best for your business.

Using a mobile app

Wondering “How can I track my small business expenses for free?” An expense-tracking app might be the right solution for you. Of course, not all of these apps are free, but some apps like Zoho Expense and Expensify offer free versions with limited tools. You can upgrade to a paid version as your business grows. 

Expense-tracking apps are great for freelancers, single-person businesses, and new business owners who don’t yet have complex budgetary needs. For more robust budgeting and integration, you might want to upgrade to an accounting software program. 

Using a business credit card

If you have a business credit card, your bank will keep track of your purchases and provide monthly statements. This is a helpful tool to use in combination with any of the methods listed above. For example, you can plug the expenses on your monthly statement into your spreadsheet or app. 

Tracking expenses is just one of the benefits of using a business credit card. It also helps you keep your personal and business spending separate. Additionally, any banks and credit card providers offer rewards programs to help business owners save money. If you don’t already have a business credit card, applying for one would likely be beneficial — regardless of which tools you use to track your expenses.

How to track business expenses in 5 steps

Feeling overwhelmed by the process of tracking your business expenses? That’s understandable, especially if you’re a new business owner. But it doesn’t have to be complicated. 

Here are five simple steps to get you started:

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1. Find the tools you need

Take some time to compare options and find the right software program, app, and/or credit card for your business. Remember that what works for other business owners might not be right for you. To help you narrow it down, search for the best expense-tracking tools in your industry. For example, certain expense-tracking apps are favored by freelancers. Some software programs, such as Restaurant365, are designed for restaurant owners. 

Once you’ve found the best software option, download the program and set up your account. Give yourself some time to learn and customize the software so you’re comfortable with it. 

2. Categorize your expenses

Break down your monthly spending into business expense categories. These categories depend on your industry and needs, but don’t hesitate to get specific. This will help you keep your financial statements organized. You can see how much you spend on fixed costs like rent, variable costs like supplies, and extraneous costs like client lunches or office décor.

Your accounting software might allow you to create your own categories for automatic sorting. If you don’t have accounting software yet, you can manually sort your expenses in a spreadsheet or journal. 

3. Log your expenses

Log your expenses manually, or by linking a business card to your accounting software. Here’s the tricky part — if you’re relying on automated business tracking, you have to make sure every expense still gets tracked. So, if you happen to make a payment with your personal card or if you ask a staff member to make a payment for you, those expenses must be manually added to your software. 

It’s best to restrict all business spending to one or two business cards. However, life happens. Just make sure you always save receipts so no expense goes untracked. 

4. Regularly review your finances

Once you have your expense tracking systems set up, it’s time to put them to use. Check on your finances regularly to identify areas for improvement. This doesn’t have to take too much time out of your routine — you can work it into your daily, weekly, and monthly schedule so you’re always in the know. 

Here are a few financial statement that will help you review and understand your finances:

  • Profit and loss statements - Creating a profit and loss statement will give you a clear picture of your business's quarterly financial health. 

  • Cash flow statements - You can review cash flow statements monthly or quarterly to understand how your business is growing and adjust your strategies. 

  • Balance sheets - Reviewing your balance sheets can reveal crucial financial information and help you keep your finances on track.  

5. Adjust your budget 

Business budgets aren’t rigid. Your budget should flex, change, and grow with your business. If you’ve been effectively tracking your business expenses, you should be able to analyze your budget and find areas for improvement. It may be time to pursue a new investment, adjust your spending priorities, or apply for financial support.

Boost your financial wellness with small business support

Tracking your expenses may not be the most exciting part of managing your business, but it’s critical. With the right tools, business expense tracking will help you stick to a budget, maximize your ROI, cut out waste, and make the most of your business tax deductions.

If you want to expand your business’s budget, One Park Financial can help!

Group of young adults celebrating with arms raisedWe help small business owners get the capital they need to grow their revenue and make new investments. If you’ve been in business for at least three months and have a minimum of $7,500 in monthly revenue, you’re eligible. Contact us to learn more about how One Park Financial can help you reach your business goal.

Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.

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