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How to track business expenses (and why it’s important)
When you’re immersed in the day-to-day running of your business, it’s easy to get caught up in how you think your business is doing financially versus how it’s actually doing.
Tracking your business expenses is important because it helps you see the big picture. It leads to accurate bookkeeping, which will allow you to see when you’ll break even, calculate your quick ratio, explore trends in your numbers, and make forecasts.
When you know where your business stands financially, you have a deeper understanding of what’s working and what’s not, and can make more informed decisions. Over time, tracking your expenses helps you to predict what expenses you have coming up, allowing you to map out your cash flow so that you can make sure you have money in the bank to cover them. Since cash flow problems are the number one reason small businesses fail, getting a clear picture of your regular and irregular expenses is vital.
Tracking and categorizing your expenses as you go throughout the year is also one of the best things you can do to make tax time more manageable. You’ll save yourself time and headaches, and cut down on work and potential cost for your accountant. Let’s look at how to do it:
Digitize all your receipts with a receipt scanner
As you may know from experience, it’s overwhelming to sit down at tax time to a pile of crumpled receipts on your kitchen table. It can be difficult to identify which receipt goes with which expense (especially if you have personal and business purchases on the same receipt), not to mention that ink fades and receipts get harder to read over time.
You’ll save yourself time and headaches by digitally capturing and filing your receipts as you go. Whenever you incur business expenses, get in the habit of snapping a picture of it immediately with a receipt scanner, so that it can be accounted for properly.
It’s important to keep all of your receipts because if you want to claim something as a business expense, you need a receipt. If you ever get audited they’ll want to see receipts for each expense you claimed, and it’s easiest for everyone if you have a clean digital record to point to.
Use software to categorize and keep your expenses all in one place
When you categorize a transaction, you’re telling your accounting software how to bookkeep that expense. This allows you to create useful reports so that you can see exactly where your business stands financially, and make informed decisions about your business.
It’s easiest, and will save you time, to categorize your expenses as you incur them so that you don’t forget what the expense was for. Most software, like Wave’s, will have an app so that you can track and categorize expenses easily on the go. Having your expenses all in one place (as opposed to partly in a spreadsheet and partly in a pile next to your desk) will save you so much stress and back-and-forth at tax time.
After you categorize the expense, you’ll want to make sure you’ve added applicable sales tax(if your business is registered to charge and recover sales tax) and any relevant notes about the transaction. If you took a client out to lunch, you’d categorize that expense under Meals & Entertainment and use the notes field to jot down what the lunch was for and who was there. Don’t forget to keep track of business use of your home or car, if that applies to you.
Have a dedicated business bank account and card
Tracking your business expenses and handling your accounting is so much easier if you have a separate business bank account. You’ll be able to keep business and personal expenses completely separate, which will make categorizing simpler and faster.
If your business is incorporated, or if you need to write or receive checks in your business name, you will need an account that your bank explicitly offers as a “Business bank account”. 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.
It’s also a best practice to keep a seperate card for your business expenses. If you have more than one credit card, keep one just for business purchases. That way you’ll never have to separate out business and personal expenses from the same receipt, which can be a headache and makes you more likely to procrastinate categorizing your expenses.
Follow the golden rule of not mixing personal and business transactions in the same account. The simpler the set up, the easier it will be to stay up to date with your expense tracking!
Connect your bank account to your accounting software to automatically import transactions
By connecting your bank account to your accounting software, you’ll be able to seamlessly and automatically import transactions as they happen. Using an accounting software that has this functionality will make it much easier to track and stay on top of your expenses.
With automatic importing you’ll be less likely to miss a transaction, especially if you’re diligent about using a separate bank account and card for business expenses. All of your new expenses will show up under your transactions each time you log in, and it’ll just be up to you to categorize them properly and link to their corresponding receipts. This minimizes the time you’ll need to spend on your bookkeeping and makes sure nothing gets looked over.
Review and categorize your business expenses regularly
Get in the practice of reviewing your expenses regularly (perhaps making it a part of your weekly review) to check that transactions are properly categorized. This will help make sure your reporting stays accurate. If you come across something you’re not sure how to categorize, don’t stress. Make a note of it and circle back to it when you’re doing your monthly or quarterly bookkeeping review.
Having your business expenses categorized and up to date means you’ll be able to check in with the financial pulse of your business throughout the year. You’ll be able to see exactly how much you’re spending, if you’re profitable or not, and make any necessary course corrections as you go.