Small business expense tracker: income and expenses, logged as they happen

The structure: types, categories and businesses

Every entry in a business expense tracker needs three labels, and a tracker that lacks any of them will need a spreadsheet beside it.

Type

Income, taxable expense, or non-taxable. The third is the one most trackers miss, and it is essential: a transfer between your own accounts, a loan drawdown, a personal purchase on the business card, the principal part of a loan payment. None of these is income or expense, and a tracker that forces them into one of the two will overstate both.

Category

In the vocabulary of the tax form you will file: supplies, fuel, insurance, repairs, tools, meals, advertising, office, utilities, contract labour. Custom categories for your trade (chemicals, plants, parts) should map to a tax line. Categorising in April means re-reading every entry; categorising on the day means April is a report.

Business

If you run more than one activity, a trade and a rental, say, each entry belongs to one of them, because they file on different forms.

Two sources, and why you need both

Expenses reach the tracker two ways. Receipts you capture at the point of purchase carry the image and the purpose, but you will not photograph everything: the online subscription, the processor fee, the licence renewal paid by card. Statements you import from the bank, the card and the payment apps catch all of those, but carry no image and only the bank's description.

Use both. The receipts are the evidence; the statements are the completeness check. The cost of using both is that a photographed purchase now exists twice, once as a receipt and once as a statement line, and the tracker must find and remove those pairs or every one of them is deducted twice.

Automating the logging without losing accuracy

"Automated expense logger" usually means one of three things, and they are not equal:

• Receipt reading. A photo is read for merchant, date and total, and a category is suggested. Good automation: the entry is created for you; you confirm it.
• Statement import with review. A downloaded statement is parsed into entries, similar lines are grouped, and the ones that need a decision are shown first. Good automation: forty lines become five decisions.
• Live bank feeds with auto-categorisation. Transactions arrive by themselves and are categorised by rules. Convenient, but the rules are wrong often enough that an unreviewed feed produces confident, incorrect books, and the feed requires giving a third party your banking credentials.

The principle is that automation should do the typing and leave the judgement. An entry nobody looked at is not a record, it is a guess with a timestamp.

Tracking income alongside expenses

An income and expense tracker only tells you how the business is doing if income is as well recorded as spending. For a service business the income record should be paid invoices, because the invoice says who paid, for what, and whether sales tax was included. Deposits on imported statements are the check: every deposit should match a paid invoice or be marked as a transfer.

The rule that keeps this honest is one source of income. Count paid invoices, or count bank deposits, but not both, or every job is income twice. Choose the rule once and apply it to the whole year.

The monthly reconciliation

Once a month, with the previous month's statements imported:

1. Every deposit is a paid invoice or a marked transfer. A deposit with no invoice is a job that was never billed properly.
2. Every receipt from the month has been matched to its statement line, and the duplicate dropped.
3. Every statement line has a type and a category; personal lines are marked non-taxable.
4. Loan and mortgage payments are split into interest and principal.
5. The month's income, expenses and net are read, and the tax set-aside is checked against them.

Done monthly this is an hour. Done annually it is the weekend that gives expense trackers their bad name.

The reports worth having

Three views cover nearly everything: income versus expenses by month, to see the shape of the year; expenses by category, with a percentage, to see where the money goes and to sanity-check the tax lines; and net profit year to date, per business, which is the base for quarterly estimated tax. A tracker that can show categories per business, rather than merged, is the one that will not need untangling in April when the trade and the rental file on different forms.