Financial Tracking 101: Best Implementation Practices and Best Tools

What is financial tracking?

Financial tracking, also known as expense tracking, is the process of keeping tabs on your income and spending, ideally on a daily basis. It’s achieved by recording receipts, invoices and business expenses on an accounting ledger. Tracking your finances goes hand in hand with creating a business budget.

Over time, financial tracking will give you a clear picture of how cash is moving in and out of your business, enabling you to increase cash flow, forecast your finances, find ways to slash business costs and identify growth opportunities. It can also help you apply for a business loan, curtail employee fraud and prevent you from scrambling at tax time.

Without financial tracking, “you will have no idea of whether you are making a profit or have a loss,” Maxine Stern, a former business mentor for Chapel Hill-Durham SCORE, told us. “I’ve had clients who think they are making a profit but, for various reasons, didn’t see they were losing money. If they were tracking expenses, they would have noticed.”

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Why is it important to track your finances?

Tracking finances may seem like a no-brainer, but it can easily fall by the wayside for time-crunched small business owners. That can be disastrous for your business both now and in the future. Finance tracking reduces the time it takes to prepare for taxes and allows you to identify potential issues quickly, which keeps employees honest. Financial tracking is vital to identifying profitable growth opportunities, creating an exit strategy for businesses that aren’t performing well and managing expenses.

How do you track your finances?

You have several options for tracking finances. Some small business owners prefer to track expenses and income the old-fashioned way: by using a pen and paper. But nowadays, most businesses use technology. The best accounting software programs often offer mobile apps and cloud-based solutions. Here are some common financial tracking methods.

Cash accounting vs. accrual accounting

Before you begin budgeting and tracking your finances, you must choose whether to use a cash-basis or accrual-accounting method.

With cash accounting, you record transactions as they occur. As soon as a payment is received, you recognize it as income. The same concept applies to business expenses. When you make a payment, you record that transaction as an expense. Cash accounting is best for freelancers, sole proprietors and very small businesses that don’t have inventory.

Accrual accounting often makes more sense for small businesses that carry inventory and/or get paid after a service is provided. With this accounting method, you record income as soon as the product is sold or the service is performed, even if you haven’t received payment yet. You record an expense when you receive the bill, not when you pay it.

One benefit of accrual accounting is that it tells you precisely how much money you make and spend in a certain time frame. That information gives you insight into when your business is busy and slow, thereby helping you project further out than you could with a cash accounting method.

“Most small businesses start off with cash accounting, and as they grow and get bigger, they move to accrual accounting,” said Robert Smith, managing director at accounting and tax advisory firm CBIZ & MHM.

Manual finance tracking vs. accounting software

After you choose an accounting method, you must decide if you’ll do the financial tracking yourself or use software. Tech-averse small business owners may prefer a manual process, while others will likely turn to accounting software or a mobile app.

Small business owners who don’t want to purchase accounting software can use top spreadsheet software, such as Microsoft Excel or Google Sheets. However, remember that using a spreadsheet is more time-consuming and prone to errors. Accounting software is generally more efficient and accurate.

Once you choose an accounting software or application, consider connecting your financial institutions with the software. This makes tracking your income and expenses much more manageable than it would be if you had to input every transaction manually. When you share financial information with an application, be mindful of the software’s security level; the last thing you want is for your small business’s financial information to fall into the wrong hands. Make sure the software vendor follows best practices for cybersecurity. 

Financial tracking using mobile apps

Some accounting software makers also provide mobile apps, which you can use to run your business from a smartphone. A mobile component will enable you to input expenses and income on the go, whether that means snapping a picture of a receipt or inputting income after you leave a winning sales meeting. Not all accounting software offers a mobile app, but it will become a budget lifesaver if you are out of the office often.

What are some tools for financial tracking?

Several tools are available to help small businesses track their income and expenses. Here are a few common financial tracking solutions and their benefits:

Google Sheets keeps tracking free.

The cheapest way to keep track of your money is through Google Sheets. This spreadsheet program is free to use but has some limitations in the number of cells and columns per sheet. Google Sheets can be an ideal expense tracker if you operate a very small business with one income stream and only a handful of expenses.

Microsoft Excel helps you stay organized.

Microsoft Excel is another option. It isn’t free, but you probably already have it if you are among the legions of business owners who use Microsoft’s suite of productivity tools. Excel is an attractive option for businesses because it is easy to use and many people are familiar with it. With Excel, you can track finances, run reports, and set up templates and formulas that are unique to your business.

Accounting software does the work for you.

Whether based in the cloud or installed locally on a computer, accounting software enables small businesses to automate many finance-tracking processes. With accounting software, you can send one-time invoices or schedule them at regular intervals, send automated payment reminders and reconcile your bank transactions. This software also generates financial reports, giving you an overall picture of your financial position. There are many accounting software programs to choose from; QuickBooks and FreshBooks are examples of accounting software programs that have built-in finance and expense tracking.

Small business owners can also opt for a mobile app, which is a free or low-cost way to stay on top of income and expenses. Mobile apps may not provide all of the bells and whistles that accounting software offers, but if you’re looking for a quick and easy way to stay on top of the money coming in and going out of your business, these tools can be useful.

What are the best practices for tracking finances?

One of the best ways for small business owners to ensure they track finances accurately is to keep personal expenses separate from business ones.

“You want to have a totally separate bank account, or otherwise it’s just bad business,” Stern said. “You won’t be able to see what’s happening to your business.”

Use accounting software to take the work out of finance tracking.

While a pen and paper may seem sufficient for very small businesses or sole proprietors, experts say accounting software and apps are better options. Sure, they may cost you upfront, but free and low-cost applications are available.

Additionally, software can simplify the process, saving you time and ensuring you stay on top of your finances. Many options allow you to create customized reports. Streamlining your finance tracking may require some upfront work, but creating standard templates will save time over the long run and reduce the likelihood of accounting mistakes.

Stay on top of finances each month.

You can’t just set up finance tracking and then forget about it; you should comb over your finances regularly to spot any inconsistencies that raise red flags or point to inefficiencies that could be streamlined.

“You want to close your books every month and start fresh,” Smith said. “If you’re tracking your expenses monthly, you will know how you are doing and can make changes in real time.”

Mike Berner contributed to this article. Some source interviews were conducted for a previous version of this article.