Understanding Expense Management: Streamlining Spend for Small Business Success

As a small business owner (SBO), managing expenses is critical when operating with a limited budget. It’s not just about tracking employee expenses like travel, software subscriptions, and office supplies, but also about optimizing spending for growth.

In its simplest terms, expense management is defined as the process of budgeting, processing, and managing qualified business expenses.

In this article, we’ll explore what constitutes an effective expense policy, expense management categories, and the benefits of automation to set your small business up for financial success.

The importance of establishing an effective expense policy

Every small business owner runs the risk of overspending, under budgeting, and facing cash-flow challenges. To control costs, ensure compliance, and drive savings, SBOs need to establish a clear expense policy, including:

• Defining eligible expense categories: Set specific limits for each category, such as travel costs, entertainment, or office supplies. For example, limit travel expenses by setting a cap on hotel rates or meal allowances.
• Determining preferred payment methods: Decide whether employees should use corporate credit cards, charge cards, or personal reimbursement.
• Establishing a clear approval process: Outline the steps for managers and accounting personnel to approve expenses, and specify disciplinary actions for policy violations. For instance, require pre-approval for any expense over a certain amount to prevent unauthorized spending.
• Identifying a set reimbursement protocol: Streamline the expense reimbursement process to facilitate real-time cost control. Use automated systems to ensure timely and accurate reimbursements.

Categorizing small business expenses for success

Poor tax compliance and inconsistent cash flow are among the top 10 financial challenges for small businesses. Having a sound expense management system helps small business owners accurately record, track, and reimburse employee expenses in real-time. To do so, it’s important to understand the main categories of business expenses, including:

• Fixed expenses: Costs like employee salaries and benefits that remain relatively constant. For example, rent for office space is a fixed expense.
• Variable expenses: Costs that fluctuate, such as utilities or employee travel expenses. These can vary depending on business activity levels.
• Direct expenses: Costs directly tied to your products or services, such as raw materials or manufacturing costs.
• Indirect expenses: Costs like rent and utilities that support business operations but are not directly tied to a specific product or service.

What are tax-deductible business expenses?

The Internal Revenue Service (IRS) defines business expenses as “the costs of carrying on a trade or business” that are “usually deductible if the business is operated to make a profit.” The IRS also provides a more exhaustive list of things that qualify as business expenses for tax purposes.

Many small business owners work with their accounting team to align their business expense categories with the small business tax deductions they plan to claim. Let’s take a look at seven commonly used business expense categories that may be deductible when filing your taxes:

1. Rent or mortgage payments for an office space to conduct business or a warehouse for inventory are tax deductible. 
2. Salaries, commissions, and bonuses for both full-time employees and contractors count as tax-deductible expenses.
3. Employee benefit programs such as healthcare plans, disability insurance, or life insurance for you and employees are tax-deductible.
4. Office expenses and supplies like website hosting and software, cleaning supplies, and even employee snacks and beverages can be deducted as supplies.
5. Utilities for a commercial space like electricity, internet, sewage, and trash pickup fees for operating your business are fully deductible.
6. Business-related travel expenses include flights, hotels, and meals—but only 50% of the cost of meals for employees and customers is deductible.
7. Advertising and marketing expenses that directly promote your business, such as promotional materials, websites, pay-per-click ads, or PR can even be deducted.

What to look for in a modern expense management solution

Most small business owners find manually tracking expenses to be time-consuming, tedious, and prone to human error. Implementing a modern expense management system gives small business owners greater visibility, cost control, and budgeting capabilities. By automating your expense management process, you can reduce errors and fraud risks, save valuable time—and gain important insights into spending patterns.

When choosing an expense management solution, make sure that it offers user-friendly interfaces, mobile compatibility, real-time notifications, and integration capabilities. With Finfare Money, you gain access to capital for monthly spending, plus you get a 360-degree view of your company spend with our included expense management platform. Modern tools like these allow small business owners like you to streamline expenses, improve efficiencies, and position themselves for growth and success.