At a high level, tracking your business expenses helps you understand how you spend money. This allows you to identify areas that need improvement, such as your factory’s process for managing aging equipment.
From there, you can make better decisions, like implementing various cost controls, allocating your budget, and streamlining your operational efficiency.
However, to actually benefit from expense tracking, you need to take a structured approach.
6 steps to tracking manufacturing business expenses
From setting up a business bank account and choosing an appropriate expense tracking system to allocating business expenses and remaining compliant with tax regulations, here are six essential steps to tracking your expenses effectively.
Step 1: Create a separate business bank account.
This may seem obvious to someone who owns a manufacturing business, but it’s still an important step you need to take.
Creating a business bank account allows you to separate personal expenses from business ones, making it easier to track expenses and manage your money.
This is especially crucial, considering that as a manufacturer, you deal with a large volume of financial transactions related to managing inventory and paying suppliers.
Step 2: Select a suitable expense tracking system
You need an expense tracking system that aligns with your manufacturing business. While you can certainly manually track expenses in spreadsheets, this is time-consuming.
You’re betting off investing in a suitable expense tracking system to record, categorize, and analyze all expenses while also allowing you to automate tracking, minimize human input, and reduce error.
Examples include comprehensive accounting platforms like QuickBooks, which offer a range of accounting features suitable for manufacturing businesses, such as invoicing and financial reporting, and simpler systems like Expensify, which specialize in expense tracking.
Learn more about the different expense tracking systems in our Expense Tracking For Manufacturing Business Guide.
Step 3: Create expense categories
Create different manufacturing expense categories. Common ones include:
- Raw materials used in production, like metals, plastics, and components
- Labor, including wages, salaries, training, and benefits
- Utilities such as gas, electricity, and water
- Equipment maintenance expenses like tools and equipment needed for repairs
- General overheads like rent, insurance, administrative expenses, and property taxes
- Depreciation that reflects the cost of wear and tear over the life of equipment
- Packaging and shipping costs of products
- Marketing and sales costs to sell more products
- Quality control expenses, such as costs related to product testing and inspection
- Research and development costs to improve manufacturing capabilities
Step 4: Record and allocate expenses
Store invoices, receipts, purchase orders, and other necessary expense documentation in your accounting or expense tracking system.
Once recorded in the system, you need to allocate these expenses to the appropriate categories to account for them. This helps you maintain accuracy in your financial reporting and prevents any oversight. For example, if you buy chemicals used in production, you’d assign them to the Raw Materials expense category.
Step 5: Review expenses
Regular expense reviews allow you to identify patterns, anomalies, and cost optimization opportunities. Ways to minimize cost include:
- Renegotiating supplier contracts.
- Improving internal manufacturing processes to reduce waste.
- Implementing technology to automate manual tasks.
For example, you may discover that inventory spoilage is increasing due to overordering, leading to expiring goods. So, you choose to optimize your ordering process by using an IMS to set a reorder point so stock is automatically ordered when it reaches a certain level.
Step 6: Remain compliant
To remain compliant and avoid penalties, you need to adhere to specific tax regulations and legal requirements around expense tracking, including:
- Laws around how expenses should be captured, categorized, and reported for tax purposes. You’ll need to consider tax regulations governing income tax deductions, excise taxes, and import/export tax (if you’re involved in international trade).
- Financial reporting standards, such as Generally Accepted Accounting Principles (GAAP), that provide a framework for presenting financial statements.
- Regulatory compliance requirements imposed by government agencies like the Environmental Protection Agency (EPA) and the Occupational Safety and Health Administration (OSHA).
The bottom line on expense tracking
Expense tracking helps you better understand your financial position, enabling you to make informed decisions that will boost your bottom line.
Just be sure to take a structured approach to tracking manufacturing expenses, from creating your business bank account and allocating expenses to the appropriate categories to reviewing costs and remaining compliant.
