Best Practices for Expense Management

Written on October 23, 2025

How to Effectively Manage and Track Business Expenses

An essential part of every business's financial health is to effectively manage and track business expenses. Keeping a close eye on every business expense is how companies can track where each dollar is going. Without keeping track of all expenses, businesses can quickly lose control of their finances and potentially cause themselves to go bankrupt. In other words, businesses have to dot all the i’s and cross all the t’s when it comes to any and all expenditures.

In this guide, we will discuss some expense management best practices that can help small businesses with this process.

What Are Business Expenses?

First, let's talk about what business expenses are. In simple terms, business expenses are all of the costs associated with operating a business. Expenses come in many different shapes and sizes, but almost all expenses fall into three categories: fixed, variable, and periodic expenses.

Successful businesses often track expenses through expense management software that simplifies and automates the process. All expenses need to be tracked in order to reach any and all financial goals. With the increase of technology and software available, this process is much simpler and can be done much more efficiently. 

Why Does Expense Tracking Matter for Small Businesses?

Expense management practices are critical for all businesses, no matter the size and industry. However, this process is even more important for small businesses that have limited resources. Every dollar is critical for small businesses that have tight margins. So, knowing where your money is going can make the difference between stability and struggle. Discussed below is how expense tracking can help small businesses succeed.

Catch Issues Before They Become Costly

Small business owners juggle numerous responsibilities and tasks daily. In the midst of managing operations, marketing, and customer service, it’s easy for financial details to slip through the cracks. So, a priority for business owners should be to have an accountant, a specific individual, or expense software that can track all business expenses. This will assist business owners in seeing all expenditures and identifying any issues out of the ordinary. Spotting errors before they escalate or unnoticed overspending can prevent any costly long-term financial crisis.

Complete Taxes More Efficiently 

Accurate expense tracking makes tax season much less stressful. When it’s time to file taxes, having your expenses tracked and organized makes the process much more effective and efficient. Well-organized records ensure that you don’t miss out on valuable tax deductions for legitimate business expenses. Expense management software helps in keeping all of your business' financial information tax-ready.

Sort Your Spending Priorities

Tracking expenses will provide insight into how your business allocates all of its money. By reviewing your spending patterns, you can determine which costs are necessary and which could be reduced or eliminated. This process will help you make decisions about spending priorities for your business.

Make Decisions With Confidence

Most business decisions need to be made with financial implications in mind. When you know your whole financial picture, like exactly how much cash is available and where it’s being allocated, you can make strategic purchases without the fear of overspending. Expense tracking provides the clarity needed to take calculated risks and pursue opportunities that align with your business goals.

Set Your Business Up for Growth

It is essential for businesses to set themselves up for long-term success and growth. Tracking expenses will allow for you to forecast future costs, identify growth opportunities, and plan for expansion more effectively. By having this clear picture in your mind, you will be able to determine how to grow your company sustainably without jeopardizing your current operations.

Reduce the Risk of Surprises

Nothing is worse than an unexpected bill or fine. Regularly monitoring expenses minimizes these unpleasant surprises by ensuring that nothing goes unnoticed. Whether it’s recurring charges, vendor fees, or compliance costs, proper tracking allows you to anticipate and plan for all of your upcoming expenses.

Optimize Budgeting

A well-structured budget is the foundation of any successful business. Budgeting is how your business can achieve all of your financial goals by understanding how funds are used. Expense management tools can help you stay on track, identify opportunities to save, and ensure that your spending aligns with your business objectives.

Monitor & Improve Cash Flow

Monitoring and improving cash flow can ensure operational efficiency and stability. By tracking all expenses, a business can ensure they have enough cash to pay bills and all other expenses. In addition, monitoring cash flow provides valuable insight into understanding the company’s financial health, allowing you to take steps to improve efficiency to ensure growth.

▶️ Download Our Expense Management Guide

Tracking Employee Expenses and Reimbursements

In many small businesses, employees often make purchases on behalf of the company — whether it’s buying supplies, paying for travel, or covering client meal costs. Without a clear process in place, these expenses can easily slip through the cracks or lead to inconsistent reimbursements.

That’s where an organized employee expense tracking system becomes essential. Every purchase made by an employee should be documented and verified with a receipt. Digital receipt collection tools make this simple — employees can snap a photo of their receipt right from their phone and upload it to your expense management system. This not only cuts down on paperwork but also ensures there’s a complete audit trail for every expense.

Once approved, reimbursements should be processed efficiently and transparently. Many modern expense management systems integrate directly with your payroll software, allowing reimbursements to be paid through payroll. This streamlines the process, eliminates the need for manual checks, and ensures employees are reimbursed quickly.

By tracking employee expenses in real time and connecting reimbursements directly to payroll, businesses reduce errors, maintain compliance, and create a smoother experience for both employees and administrators.

How to Categorize Small Business Expenses

When recording business expenses, you must use an income statement to determine your taxable income. It is important to categorize certain expenses to keep organized and help in tracking all expenses. Below are some costs and expenses of small businesses that must be recorded:

Operating Expenses

Operating expenses, also known as OpEx, are expenses that are associated with day-to-day maintenance of a business and are not directly tied to a specific product or service. These expenses are subtracted from the gross profit on the income statement to find the operating profit. 

• Examples include: Utilities, rent, and office supplies

Cost of Goods Sold (COGS)

Cost of goods sold refers to the cost of making or purchasing the products your business sells. COGS sold will affect the profit a company makes on its products. It is deducted from the business’s total revenue in order to determine the gross profit. 

• Examples: Raw materials, direct labor costs, and manufacturing overhead

Marketing and Advertising

Any marketing and advertising expenses are always included on the income statement. These expenses include all costs associated with promoting the business. Tracking these costs and the return on investment (ROI) also helps improve your marketing efforts. 

• Examples: Social media ads, print materials, website development, website hosting, and search engine optimization (SEO) services

Employee and Contractor Costs

The labor costs of your business include all wages, benefits, etc., that your employee and/or contractor earn. These costs are extremely important to analyze so you can determine staffing needs and if you are utilizing your resources efficiently. 

• Examples: Wages, benefits, salaries, payroll taxes, and freelance invoices

Travel Expenses

Any costs associated with traveling for work purposes should be categorized as travel expenses. By categorizing these expenses as travel expenses, you can reduce your taxable income. 

• Examples: Transportation, lodging, car rentals, and meals during company trips

Professional Services

Professional services would refer to any professional experts or third-party expertise to support your company. Tracking these expenses helps you budget for situations when you need these services in the future. 

• Examples: Accounting services, lawyers, legal fees, and information technology (IT) support

Taxes and Licenses 

All of these costs are mandatory in order to stay compliant, and tracking these expenses is essential to avoiding penalties and fines levied by the IRS, DOL, or other agencies. 

• Examples: Required government fees, business permits, sales taxes, and income taxes

Loan and Financing Costs

Loan and financing costs would include payments and bank fees associated with borrowing money to fund the business. Keep in mind that interest and fees are usually deductible expenses, so they should be categorized as distinct from principal payments. 

• Examples: Financing fees, interest on loans, and bank charges

Miscellaneous Expenses 

Miscellaneous and other expenses that don’t fit into any specific category can be categorized as miscellaneous on an income statement. Try monitoring your miscellaneous expenses to determine if there is a new category that can be created. 

• Examples: Charitable contributions, client gifts, and one-off expenses

Personal vs. Business Expenses

Oftentimes in business it can be unclear which expenses are classified as personal and what expenses are classified as business related. There are clear differences between the two that will be discussed in the following sections.

Personal Expenses

The simple distinction is that personal expenses can not be used to lower your company’s taxable income. The reason is because they don’t directly contribute to business operations or growth. Personal expenses are costs that relate to an individual’s personal life. Examples of this would include rent, mortgages, groceries, clothing, etc. These expenses are paid from personal funds and not business funds.

Business Expenses

On the other hand, business expenses are costs that directly relate to running and maintaining a business. Examples include office rent, employee wages, advertising, equipment, etc. These all contribute to business revenue and improving operations. These expenses can typically be written off to reduce overall taxable income.

Keeping personal and business expenses separate is crucial for tax compliance, accurate bookkeeping, and the overall financial health of the company.

FAQ's on Expense Management

What are the three types of business expenses?

The three types of expenses are: 

• Fixed: These expenses tend to stay consistent. Common examples would be rent and salaries.
• Variable: These expenses differ month to month. Common examples would be employees wages, commissions, and utilities.
• Periodic: These expenses occur occasionally. Common examples would be annual bonuses or emergency equipment replacement or repair.

What are common mistakes to avoid when managing company expenses?

One of the common mistakes many businesses make are failing to keep up-to-date and accurate records. By failing to keep these records, small costs can quickly add up and impact cash flow. Another common mistake is mixing personal and business financial information. This makes it difficult to distinguish what are actual legitimate business deductions. Finally, businesses should avoid overspending on non-essential items. It is vitally important to make sure all expenses are necessary to help the business be as cost-efficient as possible.

How to manage expenses for a small business?

In order to manage expenses effectively you have to create a clear budget and track every transaction. You can use expense management software to automate and organize your expenses. In addition, it’s important to regularly review your financial reports to identify areas where costs can be reduced. Setting financial goals is the most effective way to maintain control over finances. Ultimately, disciplined budgeting and consistent monitoring are key to keeping expenses manageable.

Which expense management tools can help businesses the most?

The most effective expense management tools combine automation, mobile access, and integration with payroll and accounting systems. Features like receipt scanning, configurable approval workflows, mileage tracking, and real-time analytics make it easier for employees to submit expenses and for administrators to monitor spending. Tools built into a unified HR and payroll system—like our software—offer the biggest advantage because they eliminate third-party apps, reduce data entry errors, and ensure every expense flows seamlessly from submission to reimbursement.

How often should business expenses be reviewed?

It’s best to review expenses on a monthly basis to ensure accuracy and spot any potential issues early. Regular reviews will help you adjust your budget and avoid any financial surprises that could negatively impact your business.

Conclusion

Managing business expenses is a critical component of running a successful company. Every business must be able to accurately monitor where its money is coming from and where it’s going. This process provides a clear picture of how resources are being used and helps ensure financial stability. By maintaining detailed records of expenses, business owners can better anticipate future costs, allocate funds wisely, and avoid unexpected financial challenges.