“You have to spend money to make money.” But if you don’t control costs and company expenses, chances are good you’re going to run out of funds.
Having a plan for how to control company spending in a business is essential to learn and enforce as a small business owner. Ready? Let’s go.
What are business expenses?
Business expenses are costs required to run a business. It could be anything from the money you pay to rent an office to the funds for your employees’ training courses. Knowing the types of expenses along with what you can deduct allows you to classify your expenses into the right group and manage them better.
Types of business expenses
Typically, these expenses are categorized into three groups: fixed, variable, and periodic expenses. These three categories of expenses help you determine what can be trimmed and what is essential when creating the perfect budget method for your business.
Fixed expenses are costs that remain constant for a period of time, such as rental, employee salaries, or interest charges.
See also: Bookkeeping for Rental Properties: 9 Best Practices to Implement Today
Variable expenses, on the other hand, are costs that fluctuate over a period depending on the situation. Examples of variable expenses are raw material and direct labor costs.
Periodic expenses incur less frequently than fixed or variable expenses. They’re payments for some special occasions such as education fees or travel expenses.
See also: Travel Expense Reimbursement: What to Know Before You Travel
What are examples of business expenses?
Business expenses are expenses related to operating a business. The top 5 most common business expenses are:
- Payroll and benefits
- Rent or lease
- Supplies, equipment, and furniture
5 steps for how to manage business expenses
Step 1. Make plans and stick to the budget.
Doing business is like running a marathon, not sprinting. Aim for long-term progress, and don’t expect sudden good luck to carry you through. You need to understand your company’s mission and vision, evaluate where your business is now, and where you want to take it in the future. To do this, it is important to have a plan in budgeting company spending.
A thought-out financial road map is essential to forecast expenses and allows you to stay within budget. That is why it is important to maintain a business expense budget. For example, if you want to expand your business in the next year, you’ll need a plan with clear goals and budgeted expenses.
See also: Bookkeeping Resources: 45+ Courses, Tools, Sites, and More!
Step 2. Know how much your fixed expenses are.
Fixed expenses are costs that remain constant throughout a particular period. The reason why these expenses stay unchanged is that they are not directly associated with manufacturing or the business’s performance. As a result, fixed expenses are considered to be indirect costs.
To determine your business’s fixed costs, think of the expenses you have to pay whether or not your company operates. For example, due to Covid-19, many companies are being forced to shut down their operation temporarily. Though there are no operating activities, businesses still have to pay for fixed costs such as rent and interest charges. Business owners must understand regular fixed costs to manage and control them effectively.
Step 3. Estimate your variable expenses.
Variable expenses are costs that fluctuate from month to month. The payments you make in a given month could be different from your earlier bills or ones you’ll make in the future. To effectively manage variable costs, you must understand the dynamics of these costs to stay competitive.
One aspect of variable expenses are costs associated directly with business activities. These costs are also known as manufacturing costs. They include raw materials, inventory, and direct labor costs.
Manufacturing costs increase either when the production goes up or costs of material rise. If manufacturing expenses and production volume go hand in hand and increase simultaneously, the business is more likely to witness a profit. On the other hand, if manufacturing expenses climb as a result of surged material costs, they are sure to hurt the business’s profitability.
To control variable expenses better, make sure you have at least three to five vendors for a particular material. It’s a poor bet to rely only on one supplier. Imagine if your sole supplier goes out of business suddenly, and you have no other suppliers to turn to—that would be horrible.
Also, once you have several suppliers, review them regularly. It’s standard practice to make an semi-annual or annual review of all your key vendors. It allows you to track which vendors still provide you with the best price for proper cost control.
See also: Budgeting Pie Chart: How to Create, Benefits, and Strategies
Step 4. Estimate periodic expenses.
Periodic expenses do not occur monthly nor annually like fixed or variable expenses. You’ll be surprised to know that these expenses are not associated with operating activities or manufacturing activities. However, there are some occasions that you’ll need these expenses, so you have to be aware of this and budget for them.
Periodic expenses include education expenses, networking expenses, travel expenses, etc. Is it necessary for your marketing team to update their knowledge and technical skills? Absolutely! When marketers up their game, that maximizes profits for the company.
Step 5. Track all your expenses.
Tracking expenses allows you to control them better. When an expense occurs, bookkeepers keep the receipt and record it in an accounting system. By doing so, bookkeepers can calculate how much a business spends in a month and create a report on spending habits.
Most businesses will generate hundreds of documents per month, including receipts, invoices, proposals, etc. It’s a labor-intensive task to categorize and record those documents manually.
Keeping track of your company spending by maintaining good financial record keeping helps you see a clear picture of your business’s financial health. Having a system to control expenses helps you have accurate bookkeeping and determine your profits or losses.
See also: The Ultimate Receipt Organization & Management Resource
Four easy ways to track your business expenses.
1. Open a dedicated bank and credit card for your business.
A business bank account and credit card is a good way to monitor company spending. It separates your transactions from personal and business and helps you keep organized and manage your cash flow.
2. Use an accounting software that can link with your business bank account.
There’s a ton of software to help you manage work more efficiently and eliminate tedious tasks. Having an accounting software helps you keep track of your financial health and aids in cost and expense control. It gives you an overview of your finances and helps you understand your cash flow. This will help you keep track of your business budget and control expenses.
Pro tip: Ensure that your accounting software lets you connect your business bank accounts. This will let you automatically import transactions to the system and ensure that you don’t miss any important transactions. It also saves you time and effort in keeping your bookkeeping in check by doing the expense management process for you.
3. Keep digital copies of your receipts.
Gone are the days of shoebox accounting! No more sorting through piles and piles of receipts. Thanks to technology, so many tools can help you digitize them. Shoeboxed is a cloud-based software that helps businesses turn paper receipts into digital data for monitoring expenses.
4. Review and classify your business expenses.
Keeping well-categorized expenses regularly helps you make sure that your reports are accurate. This is important, especially when you’re managing your business expenses and trying to avoid unnecessary expenses. This gives you foresight on your expenditures and determines whether you’re making money and the ability to adjust your business plans accordingly.
See also: What Is Revenue Expenditure vs. Capital Expenditure?
Tools for managing business expenses
Thanks to technology, you don’t have to worry about how to keep track of business expenses. There are a lot of tools to help you.
Let’s get down to the basics of business money management. Using spreadsheets when you’re not yet ready to invest in accounting software is a good start. Google sheets, for example, is a good way to track your expenses. There are a lot of tutorials online to help you build a tracker for your business expenses.
There are many useful business expense tracker apps that help you manage your business expenses. Shoeboxed makes it simple to scan and manage company expenses. The app is practical and simple to use. When you place all of your paper receipts in a Magic Envelope and mail the envelope in, the Shoeboxed crew will scan and digitize every single one of them.
Quickbooks online is a software that helps you stay on top of your company’s finances. It gives you an overview of all your transactions and even helps you maximize your deductions on your taxes.
Frequently asked questions
No, not all costs are deductible from your taxes. For example, government fines and penalties are not written off. However, as a general rule: You can claim company expenses as long as they are revenue driven. Check out our definitive guide on commonly missed tax write-offs!
To be able to write off business expenses, they must be deemed ordinary and a necessary cost to your business. You can deduct company expenses from your taxes to keep your business operational. For example, if you are a fashion designer, you need fabric, thread, and sewing materials, and you can write these off of your taxes.
Maintaining a budget is important for small businesses. That is why staying on top of your expenses is a good way to keep your finances healthy. When you’re a small business, investing in accounting software and paid apps, especially when you’re just starting out, can seem costly. Tools like spreadsheets and using free business tracking apps are a good way to start. Although it is important to note that software and apps, paid or not, are a good investment to keep your business in check.
Good business money management is your company’s lifeline. That is why it is important to keep a budget and stay on top of your business expenses. Thanks to technology, managing your business expenses does not need to be a headache!
Shoeboxed is a receipt scanning service with receipt software that supports multiple methods for receipt capture: send, scan, upload, forward, and more!
You can stuff your receipts into one of our Magic Envelopes (prepaid postage within the US). Use our receipt app (iPhone, iPad and Android) to snap a picture while on the go. Auto-import receipts from Gmail. Or forward a receipt to your designated Shoeboxed email address.
Turn your receipts into data and deductibles with our expense reports that include IRS-accepted receipt images.
Join over 1 million businesses scanning & organizing receipts, creating expense reports and more—with Shoeboxed.
Try Shoeboxed today!