Understanding how your business spends money can help you improve your overall cash flow.

Keeping track of business expenses is an important part of running a company. Business owners like you often juggle multiple roles and wear different hats to ensure your business runs smoothly, so it can be hard to consistently stay on top of your finances when things get hectic. Indeed, according to one survey, almost 40% of business owners said “managing finances and accounting is a top challenge.”

Small business owners often look for ways to cut costs and maximize profits. It’s harder to do this, however, without knowing where your dollars are going. The challenge can be compounded when you combine business and personal expenses. If you’re a sole proprietor, figuring out how to separate the expenses tied to your business from your personal finances can take some getting used to. But having a firm grip on how much your business is spending — and on what — is crucial to its success.

Wells Fargo can help you stay on top of your finances with online banking, our mobile app1, and My Money Map online tool to easily track all your spending.

Here are tips on how more rigorous expense tracking can help you make better business decisions. We’ll also discuss how expenditure tracking tools can make this easier.

Four reasons to categorize expenses: Spending awareness, helps determine changes to make; tax deductions, may reduce taxable income; business needs, helps direct resources where they’re needed most; performance analysis, creates opportunity to compare to industry standards.

1. Categorization is key

Accurate categorization of expenses and spending is a key part of running any business. Knowing where money goes and which budgets to allocate money to means you’ll have full control over your resources and helps you avoid wasting limited funds. Here are some of the benefits of categorizing spending:

  • Spending awareness: The more you know about where your money is going, the better equipped you are to make changes that can improve your bottom line. The insights can also identify opportunities for significant savings. For example, if you run a bakery and discover that you spent 50% more on flour and butter last month than the average month, that could be important information to keep an eye on to make sure your vendors aren’t hiking prices unfairly.
  • Tax deduction maximization: Assigning each expense to its appropriate category makes it easier to identify spending that is eligible for tax deductions, which can reduce the business’s overall taxable income. It’s important to continuously track your business’s spending on tax-deductible categories like employee training, business-related travel, and rent, for example. These moves will make tax time go more smoothly for you and your accountant.
  • Shifting to meet business needs: Knowing how money is spent may allow you to direct resources to different areas of the company in a way that best fits your business’s needs, ensuring that every dollar contributes to the business’s growth. For instance, if you need to hire more people or increase production to accommodate a new contract, you’ll be able to see if you have the funds to reallocate from another part of the business, such as marketing, to meet the new demands.
  • Performance analysis: Accurate expense tracking could also enable you to compare your spending with industry standards, which may help measure financial performance and identify which, if any, areas need improvement. If your expenses are correctly segmented, you can compare, say, how much your business spends on overhead with other companies in the same industry as a percentage of overall revenue. (Market research firms and industry associations can provide industry-specific data like this.)

Tip: To stay on top of your business’s finances, aim to review and categorize expenses weekly. This practice helps maintain current and accurate financial records and makes quarterly or annual financial reviews more manageable. You also want to establish good recordkeeping habits by putting receipts in one place. If you have a mix of paper and digital, consider taking photos of your paper receipts or printing your digital receipts so you can keep everything in one location.

2. Categories of business expenses

Some of the most common categories small businesses spend on include rent, equipment, office supplies, payroll, marketing and advertising, business insurance and taxes, and travel.

Other fast-growing expense categories include website and server maintenance and software subscription costs. Tools like Calendly, Boomerang, and Docusign, for example, charge monthly subscription fees to help businesses and employees schedule meetings, schedule emails, and enable digital contract signing.

Tip: If you’re running your business in addition to another job, keeping detailed records can help you determine when to work on your business full-time. To make this decision, you need to examine your personal expenses to see if you can take the plunge earlier by cutting back.

3. The power of expense tracking tools

With both the Wells Fargo mobile app and My Money Map online tool, you can conveniently track your spending. Another way to stay on top of your business’s spending is by using spend-management software, which helps conveniently manage expenses. Using software to track your expenses saves time and money and helps your employees operate more efficiently. It also gives insight into your business’s spending habits and ultimately helps improve cash flow.

Using software to track your expenses saves time and money and helps your employees operate more efficiently.

There are several small-business-accounting software options, so it’s worth checking out a few and taking advantage of their free trials if they’re available. Some features you may want to consider include:

  • Real-time expense tracking: You shouldn’t have to wait until the end of the month to see how much you’ve spent. Look for a tool that tracks expenses in real time so you can get a reliable snapshot of employee spending.
  • Simple and quick overview: You should be able to do basic spend analysis easily. Good spend-management software presents expense information in a clear, compelling way, so it’s easy for you and your employees to understand.
  • Cloud access: This allows you and your accountant to access your books anytime, anywhere.
  • Customer support: If you run into problems using the software, you want to be able to get help.
  • Integration options: Many software programs allow you to connect your books with your business bank account, payroll provider, customer relationship–management software, human resources information system, and more.
  • Automate tasks: A quality program will send invoices and record and classify expenses.

Tip: Be aware that while some software tools are free, others charge subscription fees or fees for certain features. Take advantage of free trials to see whether a particular tool is right for you and your business. Some programs are more suitable for sole proprietors, freelancers, and companies with only one or two employees, while others accommodate larger and growing businesses.

Take the next step

Wells Fargo allows you to integrate your accounts with several financial management–software tools so you can seamlessly track your business’s finances.

Getting a handle on your spending is key to any small business’s bottom line. Talk to your Wells Fargo banker about the best ways for you to keep track of spending. Using expense-management tools can help you get important insights into your business’s financial performance.

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Source: Quickbooks