Expense tracking is an important aspect of managing a small business’s finances. It can help address cash flow problems, which a majority of small businesses around the world reported experiencing in a 2023 survey.

However, small businesses might struggle to track expenses if they don’t have a solid system in place. They must be prepared to manage receipts and invoices, categorize transactions, and reconcile accounts without making errors. When done correctly, expense tracking can clarify where a business’s money is going and help to identify unnecessary spending. It can also allow businesses to make more informed decisions regarding hiring employees, investing in new tools, and planning for the future.

Below, we’ll discuss why expense tracking matters for small businesses, what challenges they face in manually tracking expenses, and how automation can help.

What’s in this article?

• Why does expense tracking matter for small businesses?
  
• How to categorize small business expenses
  
• What are the challenges of manually tracking expenses?
  
• How can Stripe help by automating expense tracking?
  

Why does expense tracking matter for small businesses?

Tracking expenses helps you run your business more efficiently. For small businesses especially, it’s important to manage spending since margins are tight and surprises can affect all plans. Here’s what expense tracking can help you do.

Catch issues before they become costly

Small leaks can drain your resources. Maybe a supplier has been quietly raising prices, or you’ve forgotten to cancel an expensive subscription. Regular expense tracking enables you to spot wasteful spending before it becomes a deeper issue.

Do taxes more easily

Taxes can become much easier when your expenses are in order. If you track everything you’ve spent money on throughout the year, you’ll likely be prepared when it’s time to file. Expense tracking can also help you take advantage of potential deductions.

Sort your spending priorities

Minor expenses such as daily coffees for the team and underused software can get lost, especially when business starts to take off. Expense tracking forces you to really examine your spending habits and decide what’s worth paying for.

Make decisions with confidence

From hiring another employee to upgrading equipment or launching a new product, big decisions can feel like risky gambles. But when you have a real understanding of where your finances stand, you can act with confidence. When tracking expenses, you look back in order to plan for what’s ahead.

Set yourself up for growth

Scaling your business can be complex and costly if you’re not prepared. Monitoring what you spend helps you understand your cost structure, spot trends to capitalize on, and predict what you’ll need as you grow. Maybe you need to order more inventory, boost your marketing budget, or hire a specialist. Maintaining detailed records lets you grow without the risk of overextending yourself.

Reduce the risk of surprises

You don’t want to be surprised by an unexpected bill or struggle to find documents when you need them. When you track expenses consistently, you can likely avoid encountering those situations. With detailed recordkeeping, you can know exactly where your money is going and be prepared for anything—whether it’s a loan application, an audit, or just a tough month.

How to categorize small business expenses

Knowing how to sort your expenses into categories is important for understanding your business’s financial health, preparing taxes, and making informed decisions. Here’s a closer look at common categories and how to use them.

Operating expenses

These are the daily costs directly related to running your business. Tracking them helps you identify fixed and variable costs, and ways to lower your overhead.

• Examples: Rent, utilities, office supplies, internet, and software subscriptions
  

Cost of goods sold (COGS)

COGS is the expenses incurred to produce your products. It impacts your gross profit margin, so you can’t accurately analyze your pricing and overall profitability without calculating it.

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

Marketing and advertising

This category encompasses expenditures related to promoting your business and attracting new customers. Knowing your customer acquisition cost helps you evaluate the return on investment for your marketing efforts. Marketing and advertising can also be drivers for growth.

• Examples: Social media ads, email marketing platforms, website hosting, search engine optimization (SEO) services, and promotional materials
  

Employee and contractor costs

This category includes the costs associated with paying your employees, whether they work on a full-time or contract basis. These costs can be substantial, so you should track them to assess whether you’re managing your resources efficiently and paying the appropriate taxes.

• Examples: Salaries, wages, bonuses, freelance invoices, payroll taxes, and benefits
  

Travel expenses

Any costs related to business travel should be labeled as travel expenses. Categorizing them allows you to claim deductions for legitimate travel expenses, which can reduce your taxable income.

• Examples: Flights, hotels, car rentals, meals, and conference fees
  

Professional services

These expenses cover any third-party expertise or support. Planning for these expenses helps you budget for situations when you need professional services most.

• Examples: Legal fees, accounting services, consulting fees, and information technology (IT) support
  

Taxes and licenses

These are the mandatory costs required for your business to operate legally. Separating them from other expenses assures that you don’t miss deadlines or payments—and that you avoid penalties.

• Examples: Business licenses, permits, income taxes, and sales taxes
  

Loan and financing costs

This category includes any expenses tied to borrowing or securing capital. Interest and fees are often deductible expenses, and they should be categorized as distinct from principal payments.

• Examples: Interest on loans, bank charges, and financing fees
  

Miscellaneous or other expenses

Categorize costs that don’t fit neatly into your other buckets, but use this classification sparingly so you won’t be left sifting through too many dissimilar expenses. Monitor your miscellaneous spending to determine whether a particular type emerges and consider creating a new category if it does.

• Examples: Client gifts, charitable donations, and one-off expenses
  

What are the challenges of manually tracking expenses?

Manually tracking all your expenses is inefficient, prone to human error, and time-consuming. While this method might work in the very beginning, it becomes less effective as your business expands. Here’s why manual tracking can become problematic for your business.

It eats up your time

If you record every transaction manually, you’ll spend a lot of time sorting through receipts, making notes, and entering data into spreadsheets. That’s time you could spend finding new clients, refining your product, or planning for the future.

Mistakes are bound to happen

No one’s perfect, and mistakes in manual tracking are almost inevitable. Misplacing a decimal, transposing numbers, and incorrectly categorizing an expense are all missteps that can accumulate into a larger issue—especially when it’s time to reconcile your books or file taxes.

Manual systems don’t scale well

What might work with a handful of transactions won’t work as your volume increases. More vendors, more purchases, and multiple payment methods create complexity, and trying to manage them all without any automation just isn’t feasible.

Consistency is difficult to maintain

Manually handling your expenses requires discipline. If you skip a day or two, you might find yourself looking through a pile of untracked receipts and struggling to remember what that $72 charge from the previous week was for.

It’s always a step behind

By the time you’ve caught up with your manual entries, your data might already be outdated. Gaps like this can make it more difficult to respond quickly with informed decisions, particularly if cash flow is tight or unexpected opportunities come up.

Reconciliation is a hurdle

Matching your records to bank statements or credit card bills is tedious and complex when you’re working manually. It can be frustrating to hunt down discrepancies or realize you forgot to log an important deal.

Reporting takes extra effort

Manually tracked expenses don’t automatically turn into useful insight. If you want to analyze trends, track spending categories, or prepare a report, that’ll require extra hours of spreadsheet work. That can work fine in theory, but in practice, it’s a lot of extra work.

Records can go missing easily

Physical receipts and invoices can get lost or misplaced. Unlike digital tools, manual systems don’t have built-in backups and can be permanently lost. That’s likely not a risk you want to take with your business’s finances.

It can lead to compliance issues

Without precise records, it’s easy to miss a tax deadline, misreport your deductions, or forget an expense entirely. Manual tracking increases the chances of costly compliance mistakes.

Collaboration is much more difficult

If multiple people or teams manage your expenses, that can cause more confusion in manual expense tracking. Sharing physical records or trying to consolidate everyone’s notes takes time, and mistakes or miscommunication are bound to happen.

How can Stripe help by automating expense tracking?

Businesses can work with a provider such as Stripe to automate their expense tracking and help them avoid the costly errors associated with manual tracking. Here’s how Stripe’s automated expense tracking makes it easier for businesses to strategize, save money, and stay compliant.

Detailed transaction records

Stripe logs every payment, refund, and fee automatically and reflects them in the Stripe Dashboard. These records offer businesses deep insight into their income and costs without the errors you might introduce with manual tracking. For example, Stripe breaks down processing fees for every transaction, so you can identify opportunities to save.

Exportable data

Stripe allows users to export transaction data in formats that are compatible with accounting software such as QuickBooks, Xero, and Excel. Combining payment data with your other business expenses makes reconciliation even easier.

Reporting and analytics

Stripe’s reporting tools generate custom reports to show revenue, refunds, and fees for any time period you choose. You’ll be able to see where seasonal fluctuations or unexpected peaks in refunds or chargebacks happen and strategize how to prevent them. These reports can also help you itemize tax deductions and prepare tax filings.

International currency support

Stripe processes payments in more than 135 currencies and handles currency conversion. It also tracks exchange rates and conversion fees, so you can operate without the guesswork.

Multisystem integration

Stripe can integrate with popular expense tracking and management platforms for a unified experience with the tools you already use. These integrations bridge the gap between payments and operations.

Real-time alerts

Stripe notifies you quickly about unusual transactions, failed payments, or chargebacks. This prompt feedback can help you respond to potential issues before they affect your finances.

Coverage at scale

As you process more transactions or reach new markets, expense tracking gets much more complicated. Stripe’s automation can scale with you—whether you’re processing a few payments a day or thousands—and it can keep your financial systems running smoothly.