How to track business expenses (and why it’s important)

November 16, 2021
5 minutes read

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. When you neglect important bookkeeping practices, like tracking your expenses, you’re missing out on crucial data that helps you make smart, educated business decisions. 

Tracking your business expenses helps you pull back, see the big picture, and really analyze your finances.

It also leads to accurate bookkeeping, which helps you see when you’ll break even (when your business is seeing neither profit nor loss), calculate your quick ratio (your ability to pay any money you owe with only cash or assets that can be quickly converted to cash), explore trends in your numbers, and make forecasts. 

We know they don’t teach you this stuff in school, which is why we’re here to walk you through how to track your business expenses. Let’s go!

How to track business expenses

Here’s the TL;DR on tracking business expenses:

  • Digitize all your receipts with a receipt scanner
  • Use software to categorize and keep your expenses all in one place
  • Have a dedicated business bank account and card
  • Connect your bank account to your accounting software to automatically import transactions
  • Review and categorize your business expenses regularly
  • Get an H&R Block tax expert specialized in small business to help with tax prep

Over time, tracking your expenses helps you to predict what expenses you have coming up, allowing you to map out your cash flow (the money moving in and out of your business).

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 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, cut down on work, and save yourself from potential costs for your accountant.

Here are five tips on how to track your business expenses:

1. Digitize all your receipts with a receipt scanner

As we all know, it’s overwhelming to sit down at tax time with 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 immediately snapping a picture of it with a receipt scanner so that it can be accounted for properly. 

You need a receipt if you want to claim something as a business expense, which is why it's so important to keep all of your receipts.

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. 

2. Use software to categorize and keep your expenses all in one place

When you use accounting software, you can categorize your transactions and expenses. This allows you to create useful reports so that you can see exactly where your business stands financially, and make informed decisions.

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.

3. Have a dedicated business bank account and card

Tracking and categorizing your business expenses and handling your accounting is so much easier and faster if you have a separate business bank account

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 separate 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 business and personal expenses from the same receipt (which is a major headache!) and make you more likely to procrastinate categorizing your expenses. 

4. Connect your bank account to your accounting software to automatically import transactions

When you connect your bank account to your accounting software, your transactions will import automatically 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.

5. Review and categorize your business expenses regularly

As a business owner, you should get in the habit of reviewing your expenses regularly to make sure your transactions are properly categorized.

 Make 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.

Let Wave and H&R Block file your taxes for you

One of the many benefits of tracking your business expenses is making tax time easier. Did you know you can make tax time even easier by importing your Wave accounting data into H&R Block and getting access to a personal tax expert specialized in small business? You can either file online with help when you need it, or hand off your documents entirely and have a tax expert file for you (which is super easy, BTW!) It’s available to all US-based customers, and only takes minutes to set up.

You’ll cut down hours of work, receive personal advice from tax pros, get all the latest info on tax deductions, and much more. Simply log into Wave and click the “Tax Filing” link in the navigation menu to get started.

By Lindsey Peacock

The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.

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