Income and Expenses: a Simple Tracking System for Your Small Business
Post #42: You don’t need an accounting degree or expensive software to be effective with managing money for your business.
In this Substack, I will walk you through the process of starting, operating, maintaining, and — if needed — selling or closing your own small business.
Today, I am going help you with setting up an income and expenses tracking system that works for your small business needs. Whether you prefer to do it manually or with accounting software (or both), this post will lead you in a better direction.
Learn more about:
The risks of NOT tracking your money
How to choose a tracking system that works for you
IRS-recognized categories for income and expenses
Creating a routine for tracking
Reconciling and reviewing regularly
Keeping track of your income and expenses is one of the most important habits you can develop as a small business owner.
👉 Subscribe to this Substack if you want to learn how to setup, operate, maintain, scale, etc… a small business. The Journey began with Post #1.
Also, be sure to check out these FREE resources:
Bootstrap Your Business Workflow - a step-by-step guide with the links to all of the top daily posts that walk you through the process from scratch
BYB Book Recommendations - a collection of the best business books to help you on your entrepreneurial journey
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Risks of NOT Tracking Your Money
Sure… you could just rely on your online banking app or monthly statements to see what your balance is today, but then what?!?
Summaries and statements are a good place to start, but they won’t give you any insight into where your money is going, what your balance will be in two weeks, or if you can afford to buy a new computer.
Without a system to track your money, you could:
Overspend. It’s easy to spend more than you earn, leading to cash flow issues.
Miss out on significant tax deductions. Deductions could save you hundreds or even thousands of dollars on your tax bills.
Pay avoidable bank overdraft fees. Overdrawing your account could lead to costly and even recurring bank fees that could have been avoided.
Incur late fees and penalties. Forgetting to pay bills on time can lead to late fees and penalties.
Damage your reputation. As your business - and you as the owner - struggle with money management, vendor and lender relationships could be lost.
Get a bad credit rating. Defaulting on your bills or paying late consistently will eventually lead to a long-term negative impact to your credit rating.
Struggle with tax filings and paperwork. Quarterly and annual tax filings become much more stressful and prone to errors (which could lead to an IRS audit).
Be forced to close your business. Poor financial management is one of the top reasons small businesses fail.
💡 Tip: in an upcoming post I will write more about why poor financial planning is the #1 reason that most small business fail.
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Choose a Tracking System
There are many ways to track income and expenses.
I’ll cover 3 methods and provide some basic recommendations for each.
📌 The best system is the system that works for you.
Manual Tracking
A manual tracking system is one that uses a combination of:
simple spreadsheet software (like Google Sheets or Excel) to log transactions, and
a document storage system for important income and expense documents (i.e.: receipts, paid invoices, check stubs, etc.).
This is a perfect - and simple - system for freelancers, gig workers, and other self-employed folks who are just getting started and only have a few transactions to track.
Accounting Software
There are many accounting software options out there.
From simple online (cloud) tools that just help with income, expenses, and budgeting to robust platforms that integrate with payroll systems and tax filings, the options are nearly limitless.
Simpler accounting tools are best for freelancers and solopreneurs who are new to business ownership.
More robust accounting platforms are better for small businesses with higher transaction volumes and larger transaction values.
It is always best to start small, stay organized, and expand when you need to do so.
Hybrid Approach
Smart and organized business owners use a hybrid approach to cover all of their bases and ensure the most transparency into their finances.
What could a hybrid approach look like?
A combination of methods could really set you and your business up for success:
Quicken for transactional accounting to keep track of balances on all of your accounts (personal and business)
Intuit QuickBooks for your business books to keep track of business transactions, bills, invoicing, expense reporting, bill of sale transactions, loans to and from your business, and other activity tracking
Spreadsheets to run forecasting models and estimates that will not impact your “real data” in Quicken and QuickBooks
Digital document storage system in the cloud for scanned or online files.
Paper receipt and document file storage system with chronological folders in a file cabinet for paper originals that need to be kept.
This magic combination of tools will help with planning, forecasting, troubleshooting, and more.
💡 Tip: review my recommendations for the top 5 accounting software platforms that are great for capturing expenses and receipts. These are great for overall accounting needs.
Income & Expense Categories
To keep things organized, create categories for your income and expenses.
If you are using accounting software, most of these categories will already be available so that you can categorize your data entry.
If you are using a more manual method, you may want to add more categories as you build up a system that works for you and your business.
Don’t over-complicate the process of categorizing your income and expenses - it is best to stick with broad categories that make sense for your business.
💡 Tip: Be sure to keep your business accounting separate from personal expenses!
Why Use These Categories?
These categories are typically reported on Schedule C (Form 1040) for Sole Proprietors or on business tax returns for LLCs, Partnerships, and Corporations.
💡 Tip: for more information about business structures:
Top Income Categories for Small Businesses
These are the most commonly used income categories, and align with IRS-recognized revenue types.
Gross Receipts or Sales: Revenue from selling products or services before any deductions.
Returns and Allowances: Refunds, discounts, or price reductions given to customers.
Other Business Income: Any additional income not directly from sales, such as:
Consulting fees
Freelance or contract work
Royalties
Licensing fees
Commissions earned
Interest Income: Interest earned on business bank accounts, investments, or loans to others.
Rental Income: Revenue from renting out business property or equipment.
Capital Gains: Profits from selling business assets like real estate, equipment, or stocks.
Dividends: Earnings from business investments in stocks or other financial instruments.
Partnership, S-Corp, or LLC Distributions: Income received from business partnerships or pass-through entities.
Grants and Government Payments: Funds received from government programs, such as COVID-19 relief grants or small business assistance.
Miscellaneous Income: Any other business-related earnings that don’t fit into the categories above (e.g., prize winnings, settlement income, or bartering transactions).
Top Small Business Expense Categories
These are the most commonly used expense categories, and align with IRS-recognized revenue types.
Advertising & Marketing – Website costs, social media ads, business cards, flyers, sponsorships, etc.
Car & Truck Expenses – Mileage, fuel, maintenance, insurance, and lease payments for business vehicles.
Commissions & Fees – Payments to agents, sales commissions, or referral fees.
Contract Labor – Payments to freelancers, independent contractors, and consultants (reported on 1099-NEC if applicable).
Depreciation – Deducting the cost of large purchases (vehicles, equipment, buildings) over time.
Employee Wages – Salaries, bonuses, and payroll taxes for W-2 employees.
Insurance – Business liability insurance, professional liability, workers’ comp, health insurance, etc.
Interest Expenses – Business loan interest, credit card interest, and mortgage interest on business property.
Legal & Professional Services – Attorney fees, accountant fees, tax preparation, and consulting services.
Office Expenses – Paper, printer ink, postage, software subscriptions, and small office supplies.
Rent or Lease (Business Property) – Office space, storefronts, warehouses, or co-working space costs.
Repairs & Maintenance – Maintenance and repairs on business equipment, buildings, or vehicles.
Supplies – Materials and consumables needed for operations (e.g., restaurant ingredients, construction materials).
Taxes & Licenses – Business licenses, permits, sales tax, and employer payroll taxes.
Travel Expenses – Flights, hotels, rental cars, and other travel costs for business purposes.
Meals & Entertainment – Business meals (typically 50% deductible) and client entertainment.
Utilities – Electricity, water, phone, internet, and heating costs for business premises.
Education & Training – Courses, workshops, certifications, and professional development.
Technology & Software – Business-related software, cloud storage, and domain hosting fees.
Home Office Deduction – Rent/mortgage, utilities, and other expenses for a dedicated home office (if applicable).
Create a Routine for Tracking
Consistency is key to maintaining financial clarity.
Set up a schedule to record transactions:
Daily or Weekly: Log income and expenses in your chosen system.
Monthly: Reconcile transactions with bank statements.
Quarterly: Review your financial reports to check for trends and tax obligations.
Annually: Prepare financial statements and review your profit and loss.
💡 Tip: be sure to check my guidance on Records Retention and Digital Storage for Receipts to manage all of your paperwork and documents.
Reconcile and Review Regularly
“Reconciliation” is just a fancy accounting word for comparing your financial records with bank statements to ensure accuracy.
Regular reviews of your accounts will help:
Spot errors or fraudulent charges.
Identify unnecessary expenses and cut costs.
Understand cash flow and prepare for future expenses.
Keep your tracking system current with reality.
Prepare for tax time and other reporting requirements.
Don’t wait for the end of the year or when your taxes are due to reconcile or it could be too late to handle issues.
Continue the Journey…
My tax guy just sent me a form to fill out. I had more expenses than income but I did my best to categorize it. I need to up my game in this area.