What Are the Best Methods for Tracking Small Business Expenses?

Sep 7

We live in a modern age, so we might as well use the tools and resources available to us. But this doesn’t mean that we throw all of our logic to the devices and AI that are out there. We have to know what these technologies are capable of right now and what parameters we still need to implement to keep your small business bookkeeping safe and accurate.

Your bookkeeping software should be able to give you a clear view of what your business is doing right now, how healthy the business is, what strategy adjustments might be needed for a more profitable year, and so much more than a simple profit and loss report.

Taxes, lenders, big and small strategy decisions all come from your books. Keep them up to date and accurate and you are swimming in a much easier process. Leave doubt in between those columns and rows, and now you’re not so sure if you are ready for tax season this year.

The following article will help you understand the best methods for tracking small business expenses and what things you should be aware of when working with small business bookkeeping software.

And if you need more insight, take the Bookkeeping Report Card to see how you are doing with your bookkeeping.

TLDR

The best way to track small business bookkeeping expenses is through a bookkeeping software. As a QuickBooks Pro Advisor, I recommend QuickBooks for Small Businesses.
Learn how to break down a small business transaction for your bookkeeping. Understanding what everything means inside your bank statement allows you to avoid fraud and categorize accurately.
Beware of the pitfalls that can happen when tracking small business expenses. You need to be careful with payment methods, inaccurate descriptions, location inaccuracies, and more when tracking your small business expenses.
My recommendations for easier expense tracking for small businesses is to avoid using generalized vendors, set spending limits, avoid direct money transfer services, assign vendors, and create consistent rules (without auto categorization).
Contact Me to set up a free 15 minute consultation call to discuss your specific small business bookkeeping needs.

Best Bookkeeping Software for Small Business Owners

It used to be that every transaction would have to be manually written down into a ledger or typed into a table.

Now, QuickBooks and other bookkeeping software can connect your bank accounts to your bookkeeping software and download transactions automatically.

These updates allow you to easily assign categories to each expense and post it to your books. At any time, you can look in and see how much you really spent on advertising versus business lunches to adjust as necessary.

As a QuickBooks Pro Advisor, I usually recommend QuickBooks as a well-rounded option that allows you to navigate your reports more easily and has more functionality for your type of small business.

You can move away from the manual entry of Excel sheets that come with more manual calculations and a lot more information that has to come directly from your head instead of through backend support.

QuickBooks allows you to categorize expenses, have a clear and defined balance sheet, create specific reports, and see your overall business health at a glance.

There can be a little bit of a learning curve, but as long as all the inputted information is done accurately, QuickBooks allows you to track your small business expenses pretty easily (with receipt uploads too). Learn more about this in my other article.

How To Break Down a Bank Transaction

Above we talked about how you can categorize your expenses, but it only gives you so much information.

These downloaded expenses don’t tell you the vendor, what was purchased, etc. They tell you how much was spent, on what date and maybe a bank memo with who might be the vendor associated with the transaction. The exact contents of the bank memo varies by bank, the vendor, and the payment processor used.

For example, a bank memo might say ““Tst NYB Pizza WPFL 3888.”

You might look at this and immediately say “nope, I don’t want to deal with figuring out all these different pieces.” And that is valid…that’s why I do what I do, so you don’t have to.

But when I see something like this as an expense, I look further to validate exactly what type of expense this is. The extra verification makes sure that your books are accurate as some things can be named the same thing but go under completely different categories: aka your books are not accurately depicting what you realistically spent money on.

I’m looking at you Genesis (gym) and Genesis (salon) and Genesis (insurance)

In this example, I’d find that this charge is for New York’s Best Pizzeria. Tst is short for Toast, which is a payment processor popular with many restaurants. NYB is the acronym of the brand. WPFL might stand for Winter Park, Florida. And 3888 is probably the location number, which is often invisible to the public, but is used internally for corporate purposes in chain stores.

So we can figure out pretty easily that the charge was for a pizzeria in Winter Park, Florida. It is hard to imagine what a person might be buying at a pizzeria other than pizza, or some other kind of food, so I can typically determine that this charge reflects a meal purchase or a business lunch and categorize it appropriately.

Looking further into each purchase, and understanding the scope of these purchases past the category association, allows for accurate books. It also allows for me to clearly identify potential fraud if something odd starts happening when looking up these business transactions.

What Can Go Wrong

We have to be aware of the pitfalls for any tracking method.

Censorship: banks will sometimes censor memos for security purposes.

The above memo may end up in QuickBooks looking like “XXX NYB PXXXX WPFL XX88.” It might even say even less, like NYB or Pizza.

Location Inaccuracies: The bank memo might have a location that doesn’t seem to belong.

Jersey Mikes wants to show up as a New Jersey expense when you purchased at a location in Florida.

Many of my Florida clients end up with charges on their bank statement from Arkansas. Normally, this would raise questions of possible fraud: Why are there charges from Arkansas if my client hasn’t left Florida all year?

Well, Walmart has their headquarters in Betonville…you guessed it, Arkansas.

So it is common to see bank charges that include “WM, Bent AR,” or something similar.

Specific Purchase Information: Many times, you can’t tell what was purchased just by the vendor name. A lot can be purchased from Amazon or Walmart that would fall under several different categories.

In the pizza example, we could be highly certain that food was purchased. But almost anything could be purchased from the Walmart example: groceries, home supplies, fishing bait, video games, hunting knives, diapers, etc. So even knowing the vendor doesn’t necessarily help you categorize the expense appropriately (and make sure that there is no misuse of funds).

This is why submitting your associated receipts with the breakdown of what was actually purchased is so important to your overall bookkeeping.

Payment Tracking: Certain payment services like Zelle, Cash App, or Apple Pay come with their own problems.

It is common for these transactions to simply say “Apple Pay” with no further information.

Zelle often shows the personal information of the vendor rather than the business name as the Zelle profile has been registered to the personal name. So the bank memo may say “Zelle: Jimmy Smith.” Which leaves us wondering and having to remember exactly who Jimmy Smith is and what exactly they were paid for.

These questions cause stop gaps in your processing, but can also cause major issues with the accuracy of your books if not looked into/recorded properly.

What to Consider

Amount inaccuracies: Look for amounts that don’t match what would be expected. If someone spent $30 at NYB Pizzaria, then there is not much to question there. But if someone spent $300 at NYB Pizzaria, that would probably indicate something unusual and possibly fraudulent. That is a lot of pizza to eat in one lunch.

Categorization Complications: The same expense can be categorized differently depending on the context of the business.

A client who goes to Auto Zone and buys a car part may best categorize the expense as “Vehicle Expenses.”

But what if the client is a mechanic? In this case, the expense may be best categorized as “Supplies.”

THere is no one-size-fits-all approach to bookkeeping. Knowing the context of what a business does, where it operates, and how it operates is essential.

This is also why we have to be wary of setting up QuickBooks automations; lots can happen that the algorithm doesn’t understand…and is certainly not going to investigate further.

My Recommendations

You deserve books that reflect reality.

In order to avoid the pitfalls I’ve mentioned above when trying to track small business expenses, I recommend a few things that will help right away.

1. Avoid using generalized vendors like Amazon or Walmart when possible.

If you do use these vendors, use them for certain categories of an expense consistently. For example, you can buy only office supplies from Amazon, but nothing else.

Make it easy on yourself so that when you see “Amazon,” you know it must be office supplies related.

2. You’ll also want to set spending limits on certain vendors in order to limit fraud.

Don’t make purchases at gas stations in excess of $50. That way any charge that is over $50 is automatically flagged for review.

3. Avoid using Zelle or other direct money transfer services if you can.

If you do use Zelle, then always add a memo stating who was paid and for what. You can also work around this by having an invoice directly associated with that exact Zelle amount and person.

4. Always upload your receipts right away.

If you wait, you’ll forget. Download the QuickBooks App and upload those receipts (or forward them from your email) right when they come in. These are essential to clarifying what expenses are for what categories on your financial reports.

5. Assign vendors to each transaction.

This way QuickBooks will always recognizes it easier in the future.

6. Use rules to make sure that expenses from the same vendorare consistently applied to the same category.

You can also check the categorization history.

Just be wary of the pitfall here: if Amazon is for multiple things, don’t give it a rule for just one item.

Also, be sure to set the rule, but don’t auto categorize. You want to be able to review everything prior to categorization so that nothing gets lost (incorrectly) in the shuffle of things.

What’s Next

I know you were probably looking for a one-stop-shop for answering the question: What are the best methods for tracking small business expenses?

But bookkeeping is more nuanced and contextual than how easy softwares make the tracking buttons.

These are your small business finances, you want to be diligent in maintaining accuracy in your bookkeeping.

Need more support, or would just like to know your customized best option for bookkeeping moving forward, set up a free 15 minute consultation with me.

Omar Helal