How to do Expense Reports for Small Businesses

Having a handle on expense reports is important for any business, but perhaps even more so for small business owners who need to track every dollar spent.

We’re going to dig into what goes into an expense report, the benefits of accurate expense reporting, creating and reviewing the report, setting up policies and guidelines for reporting, auditing expense reports, and finally some practical strategies to make it all seamless.

This guide is also related to our articles on understanding gross vs. net profit, how to read a cash flow statement, and operating income vs. EBITDA.

This list includes:

– Components of an expense report
– Policies for expense reporting
– Best software solutions for expense reporting
– Auditing your expense reports
– Tips to improve your expense report process

Let’s get started!

The what and why of expense reports

An expense report is a detailed account of expenditures made by your employees during the course of doing their jobs. You may be conjuring up images of complex spreadsheets just reading those words, but don’t worry. The process doesn’t have to be complicated.

When a member of your team makes a purchase for the benefit of the company–whether that’s a box of office supplies or a plane ticket–they log that expense into a report. On a certain day,  usually once a month, these reports are submitted for approval.

Expense reports keep track of employee spending. If Lucy from marketing has been dining at lavish restaurants on company time, you need to be aware of it. And if Sam from sales traveled cross-country on the cheapest flight possible, you should know that, too.

Why does all this matter? Well, it allows you to manage your funds, reimburse employees fairly, and keep Uncle Sam happy come tax season.

Benefits of accurate expense reporting

Let’s talk about the benefits. Start-ups and small businesses have limited resources. Every dollar counts. If you’re logging every expense, you’ll know precisely where your money is going. It’s no longer a guessing game.

Accurate records mean you know how much your staff spends on travel, how often you need to replenish supplies, and just how expensive the company holiday party really was.

It also makes budgeting easier. For example, if you know that office supplies cost $200 a month, then you know you need to allocate at least that amount for the upcoming month. If you see a sudden spike in the cost of supplies, you can investigate why and address the issue. Maybe you’re being overcharged, or maybe somebody’s hoarding paper clips. Either way, you’ll know, and you’ll be able to act on it.

Another benefit comes when tax season rolls around: accurate expense reports make filing more manageable. All valid business expenses are tax-deductible, so you could be saving a significant amount of money. By providing a detailed account of expenditures, you make it easier to deduct appropriate expenses, keeping more money in your pocket.

In short, accurate expense reporting acts as a control system, a budgeting tool, and record for taxes.

Components of an expense report

Let’s take a closer look at what you would usually find in an expense report. While the details can vary depending on the nature of your small business, there are some standard components.

Receipt details: This is the meat and potatoes of your expense report. Each entry should note the date of the purchase, the vendor, and a brief description of the item or service purchased. Some also require additional info like the location of the store or the method of payment.

Expense category: Typical categories include travel, meals, office supplies, and client entertainment, so you can see at a glance what type of expenses your business generates.

Cost: Here you will enter the cost per item or service bought, always in your local currency. Some reports might also require you to include taxes paid separately.

Purpose: You’ll need a section where the employee can state the justification for the expense. Did Ann buy a hammer for office maintenance? Jot that down. Did Ben take a client out for lunch? Note that, too.

Expense reports: a practical example

Suppose you’re in charge of a small retail store. You might see entries like this:

Expense detail: 30 boxes of paper clips from Office Supplies R Us, purchased on March 18

Expense category: Office supplies

Cost: $35

Purpose: To keep paper documents in the office organized.

Or if you run a small marketing agency, an expense report might include an entry like this one:

Expense detail: Dinner at the Seafood Shack with potential client, Mr. Smith, on March 22

Expense category: Meals / Client entertainment

Cost: $120

Purpose: Client entertainment, negotiation for contract renewal.

Creating an expense report

Let’s take a step by step look at how to create an effective expense report.

Begin with a clear definition: An expense report is a detailed list of purchases you or your employees make for your business. These can be anything from office supplies to business trips.

Choose the right tool: You can create expense reports manually, but why do that when there are so many easy-to-use tools out there? Apps like Expensify, Quickbooks, and Concur offer user-friendly platforms that make tracking purchases a breeze. These tools automatically input data from photos of receipts, keep your accounting accurate, and streamline the reimbursement process.

Detail information accurately: Include detailed justifications for each expense. It’s key information for audits and managing business costs. Include who made the purchase, what it was, why it was necessary, and the date it happened.

Categorize expenses: Break down your expenses into categories. Items such as travel, meals, supplies, and utilities should each have their own category. This helps you quickly identify where your money is going, and you’ll need it for accurate tax filings and to make sure you’re using any and all eligible tax deductions.

Keep it updated: The golden rule of expense reports: always keep it updated. Log expenses in real time, or at the very least, weekly. Delaying could lead to lost receipts, forgotten purchases, and big headaches down the line.

And what about ways to collect and organize receipts and documentation?

Embrace paperless receipts

There’s no need for a shoebox full of crumbled receipts. Most businesses now offer digital ones. Use them to relieve yourself from the burden of managing physical copies.

Stay organized

Keep your digital receipts organized with online tools. Make sure to separate them into relevant categories, just like you would on your expense report.

Make copies

Even with digital receipts, accidents happen. Servers crash, emails disappear. And when we’re talking about your business’ money, it’s better safe than sorry. Make backups of your digital receipts and store them in more than one location.

Hold onto your documentation 

For tax reasons, you’ll need to hold onto your receipts and expense reports for a certain amount of time. The exact timing can vary, but typically, it’s a good idea to keep these documents for around seven years.

Policies and guidelines for expense reporting

You should have clear company policies about what is and isn’t an allowable expense. People can’t follow rules they don’t understand. So when it comes to your business’s money, clarity is everything. Each business has its cultural nuances, customs, and expectations when it comes to expenses. These details should be clearly defined in your policies to avoid confusion.

What should be included in the policy? 

For starters, lay out which expenses are acceptable and which are not. Is taking a client out to lunch a valid expense? Are employees expected to fly economy class on business trips, or can they go business class? Your policy should leave no room for doubt.

Make it fair 

The golden rule is to keep it fair. Policies should not be too strict that they feel stingy, but not too loose either. Striking the right balance is what you’re looking for–both considerate and practical.

Define clear boundaries

Your policy should express your expectations clearly. State the acceptable range for daily meal expenses or provide a list of approved hotels with the price range. This way, your employees know their limits upfront.

Set process and procedure 

A well-defined process is half the battle won. Clearly indicate how to submit expenses, who to submit them to, and what the approval process looks like.

Details matter

When it comes to submitting proof of expenses, make what you need crystal clear. Whether it’s digital or paper receipts, invoices, or justifications, employees should know precisely what is required.

Define a time frame 

A policy should also state when expense reports are due. Monthly? Weekly? Whatever works best for your business, but make sure this deadline is communicated clearly.

Consequences

Finally, establish what happens when policies are not adhered to. Will the expense not be reimbursed? Could there be disciplinary action? Your policies should spell out the consequences clearly.

Training 

The best policy in the world is no good if nobody reads it. Offer training for your employees on the expense policy. Hold a workshop or training session to walk them through the process.

To make these policies effective, good communication and simplicity are key. So take the time to create good policies upfront – it’ll save problems down the road.

Tools and software for expense reporting

Utilizing software tools saves you time, too, and you can redirect that time usually spent on manual data input to higher priority tasks.

And the quicker the expense reporting process, the quicker the reimbursement. With these digital tools, expense reports get processed swiftly, meaning reimbursements also get settled faster.

Last but certainly not least, business expenses are legitimate tax write-offs. By easily categorizing and tracking business transactions, no claimed deductions will slip through the cracks come tax time.

Let’s look at some popular software tools:

Expensify: Known for being user-friendly and versatile, this software captures receipt data, tracks time and mileage, and provides detailed expense reports.

QuickBooks: An accounting favorite, QuickBooks also offers comprehensive expense tracking. You can link it to bank accounts and credit cards to categorize expenses accurately.

Zoho Expense: A powerful tool that automates various stages of expense reporting. It offers perks like automatic conversion of receipt data into expenses, tracking mileage via GPS, and syncing with accounting software.

Rydoo: This is another dynamic tool that manages business expenses for small to mid-sized businesses. It consolidates digital and paper receipts, tracks mileage, and streamlines the approval process.

So test drive a few tools, and see what fits the bill for your business. Easy to use, feature-rich, affordable? Don’t be afraid to experiment till you find the one you’re most comfortable with.

Reviewing and approving expense reports

Looking at the spending, checking the accuracy of the reports, and giving the final nod for reimbursements is one of your responsibilities as a small business owner.

The process generally follows these steps:

Receipt of expense reports: Your employees submit their expense reports. They should contain all necessary details, including date of purchase, vendor, purchase description, and amount spent, accompanied with supporting receipts.

Examine the reports: Go over the reports. Look for accuracy and validity of the expenses. Check if they align with your expense reporting standards.

Question any discrepancies: If there are any questionable items, ask the reporting employee for clarification. Perhaps there’s a missing receipt, or an expense that doesn’t fall into your accepted categories. They should provide an appropriate explanation or possibly adjust the report.

Approve the reports: If everything is in order, you give the approval. The financial team can then process the reimbursements. Make sure this happens promptly so as to value your employees’ commitment to the process.

Common issues and how to avoid them

Here are some issues you might have with your expense reports and a few tips on how to avoid them.

Missing receipts

When one of your team forgets to hold onto a receipt, it can cause all sorts of frustration. Not to mention, it’s not exactly compliant with tax tracking standards. Make this problem a thing of the past by strongly encouraging (or even requiring) your team to use a photo capture app for receipts. With the click of a button, they can snap a photo of the receipt right when they get it and promptly forget about it, knowing it’s safely documented.

Incorrect categorization

It can get messy quick if restaurant tabs are popping up in the office supply column. It’s easy for you or an employee to accidentally put an expense in the wrong category. To prevent this, make your categories clear, direct, and exclusive. That is, no expense should fit into more than one category. This way, your team won’t get mixed up and you’ll avoid having to re-sort later.

Unclear descriptions

Descriptions that don’t properly explain an expense can make it hard to understand or justify certain costs. They should be as detailed and straightforward as possible. Encourage your team to include who, what, where, when and why in their descriptions to eliminate ambiguities.

Conclusion

We’ve covered a lot on managing expense reports, from common issues to auditing, to improving processes.

Improving your expense report processes can be a game-changer, and transitioning to digital methods can simplify the whole process.

While perfection is a great goal, don’t let the pursuit of it deter you from making the changes necessary to improve. Refining your expense management practices is a journey, not a race. Keep at it, and over time you’ll see progress that can help lead to better financial health for your business.

Next, check out our articles on how to do cash flow forecasting, understanding prepaid expenses, and top 10 ecommerce platforms.

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