“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 you started on the pathway to financial discovery, we’ll use this article to review how to keep track of business expenses in just four easy steps:

• Set up a business bank account
• Categorize your business expenses
• Store and record your receipts
• Review and categorize your business expenses regularly
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Need a bit of TLDR on the topic of tracking business expenses before you dive into the details? 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 receipt scanner.
• Don’t do it alone: Use software to categorize and keep your expenses all 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.
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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’re considered to be any outflow of funds that are used to cover the cost of goods and services that your business uses.

For example, for a freelance designer, a laptop would be considered an expense, as would programs like Photoshop or Illustrator. But that’s not all. 

The wages paid to the part-time production coordinator who works 5 hours a week for said freelance designer would also be a business expense. Then you’ve got your meetings at the local steak restaurant to woo over clients—another expense.

Starting to see the importance of tracking? We thought that might be the case.

How to track business expenses in 4 easy steps

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

Keep scrolling to learn how to track business expenses.

Step 1: Set up a business bank account

Tracking and categorizing your business expenses is a lot easier when it’s not mixed with your personal expenses. Which brings us to this first step: having a separate business bank account.

This can look different for different businesses. For example, if your business is incorporated, or if you need to write or receive checks in your business name, you’ll need a what’s called a “business bank account.” This is a type of account that your bank explicitly offers.

If you’re a sole proprietor and don’t need to send or receive checks in the name of your business, you can use a separate personal bank account as your business account. In this scenario, keep a separate card for your business expenses. That way there’s no mixing up accounts. The same goes for credit cards—keep one just for business purchases.

At the end of the day, you never want to have to spend your time separating business and personal expenses from the same receipt. Not only is it messy and a major headache, it also makes it more likely that you’ll procrastinate the next step: categorizing your expenses.

Step 2: Categorize your business expenses

Want an easy way to track your business expenses? Start organizing them by category. By outlining the areas that you spend your money on, you’ll be able to get a better understanding of where it’s going and how to track each spend.

To get you started, grab a pen and paper. Think about what your business needs to operate and where your money goes each month: equipment, rent, payroll, utilities, meals, entertainment… the list goes on.

But remember we said this would be easy? To stay true to our word, here are just a few key categories that make the most sense for most small business owners:

• Cost of goods sold: These are the expenses that are related to selling your products or services. Packaging, shipping, and transaction fees are just three examples of what can make up this category.
  
  
• Marketing and advertising: How much does it cost to market your business? These costs include social media, print, event attendance, website design and development, and more.
  
  
• Dues and subscriptions: This category is made up of the fees that you pay for professional services, tools, and associations. This could be a Chamber of Commerce, accounting tools, your Adobe or Microsoft Suite, or your subscription to your favorite business magazine so you’re up to date on best practices.
  
  
• Payroll: This category accounts for the wages and salaries you pay to employees, contractors, and yourself.
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Once you’ve outlined the categories of your expenses, you’ve got one more step: tracking!

And don’t worry: with Wave, this is the easiest step of all. Sure, you could use spreadsheets, but when you use small business software like Wave and go with the Pro Plan, your bank account and Wave automagically connect to import transactions*. The result? Less work for you. (See? We meant it when we said automagically.) 💫

Step 3: Store and record your receipts

No matter what method you choose, storing and recording is a must. It keeps you organized and helps you determine your eligibility for certain tax deductions.

If you do decide to go the paper route, here are a few tips to keep you organized.

• Keep things separate. Don’t just throw your receipts in your purse or wallet. Keep a separate compartment in your bag to store your paper receipts, then file them at the end of the day. If that’s too much of a commitment (hey, we get it), pick one day a week that’s dedicated to this activity.
  
  
• Use folders and binders. We know… seems kind of archaic, right? But for some, this is the best way to stay organized. If that’s you, make a folder for each month and file your receipts in it. Depending on how detailed you want to get, you can even organize your folders with tabs for each expense category. Have one secure place, like a filing cabinet, that you can store it all in.
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If all this seems too much to handle, use software that makes it easy. Not to toot our own tracking horn, but our receipts feature is known to be a tax-time-stress-reliever. Just sayin’.

Step 4: Review and categorize your business expenses regularly

The best news about this step? It’s not really a step at all. Reviewing and categorizing your business expenses on a regular basis is something that should (and will) become routine for any organized business owner. It helps you stay on top of your cash flow, but also lets you see the overall financial health of your business.

The result? You make better spending decisions, and your business reaps the rewards.

Why is tracking business expenses important?

Tracking business expenses does more than keep you organized. It keeps your business up and running. Here are just four reasons why tracking business expenses should be a priority for any small business owner.

Save your business time and money

Knowing what and how much you’re spending and when it’s all due is the key to staying organized and on top of your overall business health. Without having a clear understanding of these things, you might run into a few problems.

For example, unpaid or late business invoices that can add up or not having enough money to pay staff or contractors. In these scenarios, you cause damage to not only your bank account, but your business’s reputation, too.

Get a clear picture of business financials

When you know what and how much you’re spending, you get a much better view of your business’s financial standing. This is because instead of checking in just 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. 

Stay compliant 

No matter the size of your business, you’ve got rules to follow. And not just at tax time (but then, too!). For example, you might have shareholders or a business partner who needs to see what’s flowing out of the business and who’s approved it. This is where tracking proves to be very beneficial. 

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. It lets you prioritize certain spending or can help you figure out how to reallocate money to pay off debts. Plus, it helps you set realistic goals for your business’s future.

Start tracking business expenses now

Tracking business expenses is just as important as it is easy. Start by setting up a business bank account, then categorize your business expenses into key categories. When you’re spending, store and record your receipts (or find a software that does it for you!) and make sure you’re reviewing your expenses regularly.

When you’re proactive with expense tracking, everything else feels a little less stressful. Especially when you’re ready to claim those deductions. 🤑

Business expense tracking FAQs

What types of business expenses are tax-deductible?

According to the IRS, there are lots of business expenses that are tax-deductible. That said, a business needs to provide complete accounting of the expense. This includes expenses like mortgage, rent, advertising costs, employee benefits, equipment maintenance, and more. 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.

What accounting method is best for tracking business expenses?

For small businesses, there are typically two types of methods to help you with track expenses: single-entry or double-entry accounting 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 very small amounts of 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.
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^{*We use Plaid to facilitate bank connections. Not all financial institutions are supported so we can’t guarantee that you will be able to connect an account. Check Plaid's troubleshooting guide for more information or learn more about how bank connections work at Wave.}