“How are you really doing?” isn’t just a question we (try to) answer in therapy. It’s also one that you need to ask yourself as a business owner—especially when it comes to finances. The good news? Finding out the answer is pretty easy.

To get started, we’ll go over how to keep track of business expenses in just four easy steps:

• Separate personal and business finances
• Choose an expense tracking system (like Wave’s receipts feature!)
• Log and categorize expenses consistently
• Set a review and reconciliation schedule

Need a TLDR on tracking business expenses before we dive in? We’ve got you (and your expenses) covered. Here are some quick tips and takeaways:

• ‍Store your receipts: To make this easy, digitize all your receipts with a receipts scanner.‍
• Don’t do it alone: Use software to categorize and keep your expenses in one place.‍
• Keep things separate: Have a dedicated business bank account and card.‍
• Go automatic: Connect your bank account to your accounting software to automatically import transactions.
• Make it a habit: Review and categorize your business expenses regularly.

Sounds simple, right? Read on to see how easy expense tracking can really be.

What are business expenses?

Business expenses are funds paid by your business for your business. They include any outflow of funds used to cover the cost of goods and services that your business uses.

For any business, from a bustling agency to a solo freelance designer, these costs add up to create your full expense profile. They include everything from the tools of your trade to the people who help you get the job done.

For example, a freelance designer might incur expenses for:

• Equipment: Your trusty laptop, a high-resolution monitor, or even a specialized camera.  
• Materials: Think art supplies, subscriptions for stock image libraries, or prototyping materials for a new design.  
• Software: Essential creative programs like Adobe Creative Suite, office tools, project management apps, and accounting software.
• ‍Service providers and subcontractors: Payments to other freelancers, consultants, or your accountant and legal team.

Tracking each of these expenses helps you maintain a crystal-clear picture of your financial health. Granular tracking also helps you maximize tax deductions, make smarter spending decisions, and ensures you're always compliant with all of your pesky IRS obligations.

Why is tracking business expenses important?

Tracking business expenses keeps you up and running. Think of it as your business's financial GPS, guiding you away from potential pitfalls and bumpy roads.

Without regularly tracking your expenses, you could encounter some serious headaches, like:

• Cash flow complications: You might find yourself in a bind, unsure if you have enough money to cover upcoming bills, or where it went.
• Tax time terrors: Disorganized records make tax season a nightmare, and can lead to missed deductions and potentially higher tax bills or even penalties.  
• Inaccurate financial picture: Trying to make big business decisions without clear expense data is like driving blind. You could misallocate resources or miss growth opportunities.  
• Compliance and legal risks: Messy books can raise red flags with the government, increasing the chances they’ll take a closer look at your books, and potentially leading to legal issues.  
• Difficulty securing funding: Lenders and investors want to see clear, accurate financial reports. Without them, proving your business's health and potential for growth becomes a tough sell.  
• Financial inefficiencies: Untracked expenses can hide overpayments and missed payments, quietly reducing your profits over time.
• ‍Needless stress: The anxiety of disorganized finances, especially during tax season, can be high. Keeping things squeaky clean year round is the easiest way to sail through tax season without any undue stress.

Here are four key reasons tracking business expenses should be a priority for any small business owner:

1. Save your business time and money

Knowing what and how much you’re spending, and when bills are due, is the key to staying organized and on top of your overall business health.

Without having this, you might run into problems. For example, unpaid or late business invoices can add up, and you might not have enough money to pay staff or contractors. None of that helps you grow your business and achieve financial security.

As a freelance designer, for example, meticulously tracking all your software subscriptions might help you discover you're paying for tools you no longer use, leading to immediate cost savings.

2. Get a clear picture of business financials

When you know how much you’re spending, and on what, you get a much better view of your business’s financial standing. Instead of checking in once a month or once a quarter, you’re actively managing your cash flow. This helps you make educated short-and-long term financial decisions based on real-time data, not just your gut.

Back to our freelance designer example. By consistently tracking your expenses, you can easily see how much you're investing in new design software versus marketing efforts. This lets you adjust your budget and invest more into things that really move the dial for your business.

3. Stay compliant

All businesses need to follow the rules. And not just at tax time (but then, too!). You might have shareholders or a business partner who needs to see what’s flowing out of your business and who approved it. To do that, you need to track business expenses regularly.

It's especially important to note that if you file a Schedule C to report profit or loss from your business, your odds of being audited by the IRS go up. The IRS pays close attention to Schedule C due to the numerous deductions available. If you file one, and haven’t stayed on top of your expense tracking, then you may find yourself in a sticky situation.

4. Optimize your cash flow

When you track your business’s expenses, you’re able to assess your budgets to see what’s working and what’s not. This lets you prioritize certain spending or figure out how to reallocate money to pay off debts. Plus, it helps you project your future cash flow and set realistic goals for your business’s future.

For a freelance designer, this means you can track the due dates of large recurring expenses like software subscriptions and correlate them with anticipated client payments. This helps you make sure you have enough cash on hand to pay your bills, avoid late fees, and maintain a healthy financial flow, allowing you to invest in new projects or tools without stress.

How to track business expenses in 4 easy steps 

Tracking business expenses isn’t just a way to keep yourself organized. It helps you look at the big picture so you can make more educated decisions for your business. To get to that point, you’ve got to start somewhere—and as you’ll soon find out, that starts with keeping a bank account just for your business.

Keep scrolling to learn how to track business expenses.

Step 1: Separate personal and business finances

The absolute first step to mastering your business expenses is drawing a clear line in the sand between your personal money and your business money. This isn't just about opening a new bank account (though that's definitely a smart move!), it's about building the consistent habit of keeping these two financial worlds completely separate.

While a dedicated business bank account and credit card are the gold standard, it’s key to consistently use these distinct channels for all your business transactions.

Separating your business transactions helps:

• Make it easier to categorize expenses: When every business transaction flows into its own account, it's instantly identifiable as business-related. 
• Reduce stress if subjected to an IRS audit: A clear distinction between your personal and business finances makes it easy to prove the legitimacy of your business deductions, showing that you're not improperly claiming personal expenses.
• ‍Give a more accurate analysis of business spending: By isolating your business's financial activity, you get a true, unbiased picture of your company's performance. This accurate data is essential for making smart decisions, spotting spending trends, and optimizing your financial resources, without accidentally getting mixed up with your personal bank account.

The key here is discipline. Even with separate accounts, you need to be consistent about using them only for their intended purposes.

Step 2: Choose an expense tracking system

Once your personal and business finances are neatly separated, it’s time to pick your expense tracking sidekick. You’ve got options, from manual methods to dedicated software.

For new businesses or those with very few transactions, manual approaches, like using spreadsheets, might seem like an okay starting point. They’re familiar, often free, and don’t require special tech.

However, these methods can be a real time-sink, demanding manual entry for every single transaction. They’re also highly prone to human error, which can lead to major headaches and wasted resources. Simply put, the hidden costs of manual tracking often outweigh the initial "free" price tag in terms of lost opportunities and wasted time.

This is where dedicated software truly shines. Small business software, like Wave, for example, is designed to manage both the "money-in" and "money-out" aspects of your business, all in one place.

This includes:

• Sending and tracking invoices (money going into your business): Wave offers unlimited, customizable invoicing. You can create professional invoices, set up recurring billing, and accept online payments via credit card or ACH, making it super easy to get paid.
• ‍Uploading and categorizing the money going out of your business: Wave simplifies expense management by letting you import your business transactions into Wave, cutting down on manual data entry and boosting accuracy. You can even manually add cash expenses to ensure every penny is accounted for.

With a Pro Plan subscription, connecting your bank account to Wave means transactions are automatically uploaded and categorized in one place. Transactions typically update daily, giving you real-time financial visibility without the manual grind.

Wave’s receipts feature, available as part of the Pro Plan or on its own, lets you snap pictures of paper receipts with your phone, and then upload them via the mobile app, desktop, or even by forwarding them via email. Wave then automatically creates expense transactions and merges duplicates, making your life even easier.

Step 3: Log and categorize expenses consistently 

Consistently logging and categorizing expenses is super important for maintaining accurate financial records that you can use to understand your spending. Here’s how categorization works.

Every financial transaction your business makes falls into one of five universal accounting categories: assets, liabilities, equity, revenue, and expenses. For the purpose of tracking your spending, we're focusing on the "expenses" category here.

Within this main "expenses" category, you'll have various types of expenses that reflect where your money is actually going. By understanding and sorting your spending into these specific types, you'll get a much clearer picture of your financial health.

Here are a few key types of expenses small business owners commonly track:

• Cost of goods sold (COGS): These are the direct costs related to selling your products or services, like packaging, shipping, and transaction fees.
• Marketing and advertising: This covers what it costs to promote your business, including social media ads, print materials, or website design and development.
• Dues and subscriptions: This includes fees for professional services, tools, and associations, such as accounting software (like Wave!), industry memberships, or business magazine subscriptions.‍
• Payroll: This accounts for the wages and salaries you pay employees, contractors, and even yourself.

Wave makes this easy by helping you to categorize transactions to specific accounts, ensuring all income and expenses are tracked under relevant categories for accurate reporting and tax purposes.
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Step 4: Review and reconcile expenses regularly 

You’ve separated your finances, chosen your system, and diligently logged your expenses. Now for the crucial final step: regularly reviewing and reconciling your recorded expenses with your official bank statements. This step is essential for keeping your financial records squeaky clean and accurate.

Reconciliation means comparing every expense and payment in your accounting system with what your bank or credit card statements show. This cross-referencing helps you catch any discrepancies, errors, or missing entries. Many financial pros recommend doing this at least monthly to maintain consistent financial accuracy and nip any issues in the bud.

Wave is built to help you with this vital step by easily helping you match transactions from your bank statements to the entries within Wave. This capability helps you quickly identify and correct any discrepancies, ensuring your books are up-to-date and more accurate.

Best practices for expense tracking

Once you've got the basics of expense tracking down, it's time to level up your game with some best practices. Here are some tips:

• Save digital receipts: Ditch the paper clutter. Capturing digital copies of your receipts is a game-changer. Wave's mobile app, for example, lets you snap a photo of a receipt, and its smart OCR technology extracts and organizes the details. That saves you hours of manual data input, and allows you to store copies of your receipt digitally in the cloud.
• Add notes to transactions: Don't just log it, explain it! Adding detailed notes to your uploaded receipts helps you remember what the expense was for, and how to best claim it for tax deductions.
• Create a monthly budget vs. actuals: A smart financial strategy involves comparing your planned spending (budget) against your actual expenditures each month. This helps you spot areas of overspending, pinpoint where funds could be reallocated more effectively, and identify opportunities for savings. Wave helps you generate key reports that can help you track your progress against your financial goals.  
• Use tags for tax categories: Beyond basic categorization, using specific accounts or tags for tax-related categories can make tax season a breeze. For example, if you have a bunch of expenses tagged as utilities for your home office, you can easily get the total amount of money you spent on that specific expense category, making it easier to claim that on your tax forms.
• ‍Automate recurring expenses: Connecting your business bank account to accounting software like Wave’s means transactions for recurring expenses (think monthly software subscriptions or utilities) are automatically imported and categorized.

Trust us. Following these best practices will be a game-changer at tax time and, and help to bring our stress levels way down.

Common expense tracking mistakes and how to avoid them

Even with the best intentions, small business owners and freelancers can stumble into common expense tracking pitfalls. But don't worry, recognizing these mistakes is the first step to avoiding them and keeping your financial health on track.

Here are a few to look out for:

Mixing personal and business spending

This is a big one! Using personal funds for business expenses (or vice versa) creates a messy financial picture, making it tough to distinguish legitimate business deductions and increasing your risk of IRS scrutiny.

‍How to prevent it: Strictly separate your personal and business finances from day one. Open and consistently use a dedicated business bank account and credit card for all business-related transactions. This creates a clear paper trail for tax purposes.

Not making reconciliation a habit

You need to be checking and comparing your bank statements with internal account records on the regular. If you don’t, you can miss account errors, transactions, or even fraud—all of which will cause a confusing financial picture come tax time.

How to prevent it: Dedicate specific time each month to reconcile. Accounting software like Wave’s streamlines this process by automatically importing transactions and flagging discrepancies, making it much simpler to ensure accuracy.

Not backing up data or keeping poor records

Relying solely on physical receipts that can get lost or fade or failing to maintain organized digital records puts your tax deductions and audit defense at risk.

‍How to prevent it: Use cloud services like Google Drive or use Wave's receipts feature, which captures and stores digital copies. It's wise to keep tax-related documents for at least seven years.

How Tru Williams uses Wave to track business expenses

Meet Tru Williams, a brand photographer and videographer with six years of experience capturing moments in sports, wellness, and fashion.

Like many creatives, Tru started her business to help people confidently show up in front of the camera—not to become a part-time accountant. Her biggest challenge? Consolidating financial information from various places.

That's where Wave stepped in. As a Pro Plan user, Tru raves:

"Wave makes managing business transactions easy! The receipts feature lets me scan receipts in-app, auto-populates the details, and syncs transactions instantly to my desktop."

"Wave makes managing business transactions easy! The receipts feature lets me scan receipts in-app, auto-populates the details, and syncs transactions instantly to my desktop."

She loves how Wave connects her bank account, automatically merging and categorizing transactions, and especially appreciates the transaction splitting feature, which gives her a clear picture of merchant fees.

Being able to do all this on the go with the Wave mobile app takes a lot of stress out of tax season.

Start tracking your business expenses now

Effective expense tracking is your business’s superpower. It's the key to understanding your financial health, making smart decisions, and kicking tax season's butt.

By embracing the four easy steps—separating your finances, choosing a smart system like Wave, consistently logging and categorizing, and regularly reviewing your records—you're setting your business up for success.

Wave is designed to simplify these essential tasks, from automated bank connections and OCR receipt scanning to seamless invoicing. It empowers you to manage your money like a boss, freeing you up to focus on what you truly love: growing your business.

Take the leap. Grab the finance bull by the horns with proactive business expense tracking. It’s not the most exciting task in the world, but we promise it will make your life much easier each spring.

FAQs about tracking business expenses 

What’s the easiest way to track expenses?

The easiest way to track expenses is by leveraging digital tools like receipt scanning and connecting your bank account to accounting software. This automates transaction imports and data capture, significantly reducing manual effort and boosting accuracy.

What types of business expenses are tax-deductible?

According to the IRS, there are lots of business expenses that are tax-deductible. Some deductible business expenses including expenses like mortgage, rent, advertising costs, employee benefits, equipment maintenance, and more. That said, you’ll need to provide proof of the expense. You can find out more here.

Do you need physical copies of receipts for taxes?

Nope, the IRS does not require a physical paper receipt for taxes. Digitized copies are perfectly okay, because they provide proof of your expenses.

Which bookkeeping method is best for tracking business expenses?

For small businesses, there are two main methods to help you with tracking expenses: single-entry or double-entry bookkeeping methods.

Single-entry tracks deposits and purchases, calculating the difference between the two, which is your cash on hand. This method works for very small businesses with few transactions.

For most businesses—especially with more than one employee—double-entry bookkeeping is a better option. In double-entry bookkeeping, your business’s transactions are included in at least two accounts using debits and credits. You can learn more about both methods here.

Can I use Excel or do I need software?

While using spreadsheets can be a low-cost starting point, it’s time-consuming and prone to errors. Accounting software like Wave’s offers bank connections, real-time insights, and secure storage, making expense tracking more efficient and accurate.

How long should I keep receipts?

It's crucial to capture digital copies of receipts as quickly as possible before they fade, or you lose them under couch cushions. For tax purposes, it's a best practice to retain all tax records and supporting documents for at least seven years from the date your tax return was filed.