What Is the Key Difference Between Cost and Price?

If you’re new to running a business, it’s important to understand the key difference between cost and price. While these terms are frequently used interchangeably, they have very different meanings in financial statements. Misunderstanding or using these terms can lead to making accounting errors or wrong business decisions. 

In this article, we will bring you an overview of the key difference between cost and price and the factors that affect each, with a bonus of the most typical examples of cost and price. 

The key difference between cost and prices

In its most basic form, cost refers to the total expenses incurred to create a product or service, while price refers to the total amount a customer is willing to pay for a service or product.

Profit is the first difference between the costs incurred and the price paid. The price of any service or product is usually more than its cost because it includes the profitability and the cost of producing the item. 

The second difference between cost and price is that the cost of a product can influence its price. For example, if there is an increase in labor costs, businesses need to increase the price to earn profit. 

Market factors can affect both the cost and the price of every product. The difference here is that: While price fluctuations usually occur outside the business context, and you can do nothing about it, a business can lower the product price, which stays under its control, to minimize this effect. 

What are the factors that affect the price?

Two fundamental factors that significantly impact price are supply and demand.

Supply

Supply refers to the number of goods or services that the industry can deliver. It includes both visible and invisible products and services, such as cars, data entry, marketing, etc. Several times, the quantity is limited. This implies that only a limited amount of items and services are available at any given moment.

Demand

Demand refers to the market’s need for an item, whether tangible or intangible. Like supply, the number of consumers is limited. Demand may fluctuate depending on several factors, including affordability, the worth of an item, and the need for such products.

What are the factors that affect the cost?

The cost of a product is determined by two main factors: risk and inflation.

Risk

The cost of a product is directly impacted by risk. If the capital required to create an item is high-risk, the price will almost certainly be higher.

Inflation

Product prices are also affected by inflation. In most circumstances, financial institutions engage to maximize employees’ wages.

Furthermore, the supply of raw materials and other manufacturing necessities directly impacts the cost of an item. Products with scarce essential ingredients may have higher prices. Similarly, items with effortlessly natural ingredients have lower production costs.

Examples of cost and price

Here is a typical example of the difference between cost and price: If a T-shirt costs $20 to produce, its price must be higher than $20. Otherwise, the business cannot earn a profit on its sale. 

So, before determining the appropriate price for the T-shirt, the business first had to determine the cost of producing the T-shirt. This cost includes material expenses, labor expenses, location expenses, delivery expenses, etc. 

Another common example of cost and price is that costs are subtracted from prices to arrive at a business’s profit, either for individual products or in aggregate for the entire business. For example, if a company generates $1,000 of sales from its product prices and incurs $800 in costs, its profit is $200.

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The bottom line 

Though similar in everyday language, cost and price are related but different terms. It’s crucial to clarify the difference between cost and price, especially when it comes to conducting financial analysis or making investment decisions. By that, you will have a better understanding of how they impact a business’s financial profile and be able to make accurate business decisions.

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What Is Revenue Expenditure and How It Differs From Capital Expenditure

Revenue expenditure is one of the most confusing concepts and usually gets mixed up with capital expenditure. The confusion between these two types of expenditures can lead to severe consequences for your taxes and decision-making as your accounting figures might change significantly. 

We’re here to help you avoid this situation from happening. 

Scroll down to understand what revenue expenditure is and learn the key differences between revenue expenditure and capital expenditure. 

Definition of revenue expenditure 

Revenue expenditures are short-term expenses incurred that are significant for generating revenue within the same accounting period. It also usually refers to costs associated with existing fixed assets, which are spent to merely maintain the assets in their working condition without adding any additional value. 

Typical examples of revenue expenditure are repair and regular maintenance costs. Those expenses are necessary to keep your machines or equipment operating well. At the same time, they don’t substantially improve or extend the assets’ useful life for future financial benefits.  

Types of revenue expenditure

There are two main categories of revenue expenditure: 

  • Expenses for maintaining revenue-generating assets (e.g., cleaning, repairs, and maintenance costs)
  • Expenses for running the day-to-day business (e.g., wages paid to factory workers, utility expenses, rent, and office supplies)

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Key differences between revenue expenditure and capital expenditure  

First of all, what is capital expenditure? 

Capital expenditure is the amount spent to acquire or considerably upgrade the capacity or capabilities of long-term assets like equipment, machines, or buildings.

The key difference between the two is time scale, whereby revenue expenditures simply keep the business going on a day-to-day basis while capital expenditures invest in the longer-term growth of the business.

To help you easily see the main differences between revenue expenditure and capital expenditure, we’ve created a table to summarize below: 

Revenue expenditureCapital expenditure
Operate day-to-day business Acquire long-term assets 
Maintain long-term assets in working condition—add no extra valuesImprove long-term assets—add extra value
Provide benefits only for the accounting period Provide benefits for more than an accounting period 

Want to read more about finance? 

If you’d like to explore more entrepreneurship stories, financial tips, or productivity tools, find more posts like this on the Shoeboxed blog.

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Bad Spending Habits That Could Hurt Your Business

As a business owner, the challenge of how to increase profits is on your mind all the time. Improving the quality of your products and services or investing more in marketing are usually the first methods businesses think of to make more money. Yet, stopping bad spending habits is also a very effective way to grow your income. You can avoid losing money on unnecessary expenses and reallocate that cash to value-driving factors. 

This article will help identify the most common spending habits that harm your business. Hopefully, you can steer clear of them to build a healthy financial environment for your business. 

The 4 spending habits to avoid for your business  

Here are the most common spending mistakes that every business owner should be aware of:

Spending without a proper budget 

This mistake is commonly seen in newly established small businesses. They don’t think a budget is necessary when their companies only have a few financial activities. This is in fact incorrect. Not having a reasonable budget can lead to multiple painful consequences like overspending, a high chance of going into debt, a lack of savings, and less financial security. 

Additionally, when your business operates without a budget, it makes dealing with unexpected expenses, cash flow management, and meeting your financial goals way more challenging. In short, a budget allows you to allocate money more wisely, resulting in saving more money.  

If you don’t know how to make a budget yet, check out our 7-step guide to create a business budget.

Inconsistently and insufficiently recording spendings 

It’s disastrous when a business fails to record spending properly. This leads to being unable to keep good track of your expenses. You have no idea how much money was actually spent, making it impossible to determine your net profit. When you don’t have spending calculated accurately, you’re unable to evaluate your financial performance; hence no appropriate business strategies can be devised to create future growth. 

On top of that, poor spending records will guarantee that you have a miserable time when tax season comes. You’ll have no concrete data to file for tax deductions, meaning you’ll need to pay more than necessary to the IRS. That’s why you should always have your spending correctly recorded in your journals. If you don’t have enough time to do the recording, it’s best to outsource a freelancer or a professional bookkeeper.   

Another tip to avoid this bad spending habit is to keep your receipts. Every purchase goes together with a receipt. Keeping and organizing the receipts will help you better keep track of your spending and be ready to provide the IRS proof for tax deductions when required. 

Shoeboxed can help you do this with ease. Shoeboxed is a receipt scanner application that digitizes your receipts in just seconds. Your receipts will be safely stored in the cloud and easy to search whenever needed. Scanned documents from Shoeboxed are also legible and fully accepted by the IRS. 

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You might also be interested in: 7 Bookkeeping Practices Every Business Should Implement.

Not paying your purchase orders on time

Many businesses habitually pay their purchase orders as late as possible, which is fine as long as you pay them on time. This is because not paying on time can have serious consequences in the long run. The most obvious result is late payment penalties. 

While penalty costs may not be much for each purchase order if your payment is only a little late, those small penalty fees add up to hurt your profit. On top of that, late payments will severely harm your business reputation in the long run. Suppliers who may have heard about your history of late payments will be wary of doing business or offering you a good deal. 

Such problems won’t happen if you take extra care with your payment deadlines. Make sure you have the money/documents ready and processed at least a few days before the due date to have enough time to deal with any unexpected issues that arise. 

Using your personal credit card to pay for your business expenses 

Drawing a boundary between personal and professional spending can be confusing and difficult for self-employed individuals, small business owners, and freelancers. That’s why many of them end up using the same credit card for personal and corporate purposes for convenience. However, this habit may not be the best, and there are multiple reasons why. 

Using your personal credit card for business expenses will prevent you from building your business credit history. Without a good business credit history, you’ll find it challenging to apply for business loans, equipment leases, etc. because before lending you money, investors and lenders always check your business’s credit history. 

Additionally, a personal credit card has a lower credit limit than a business credit card. For that matter, your personal credit card will be of no use when you need to acquire something expensive for business purposes like machinery and equipment, office renovation, lease or rent, etc. 

Lastly, this spending habit makes your tax filing process painful. Trying to find business costs by going through your personal credit card accounts takes time, can lead to mistakes, and may even result in an audit. Keep these costs in one place – your company credit card – to make things easier for yourself.

You might also be interested in: Which Small Business Credit card is Best for Your Biz?

Want to read more about business? 

If you’re interested in entrepreneurship stories, business tips, or productivity tools, find more posts like this on the Shoeboxed Blog. Shoeboxed is a well-trusted tool to help businesses, freelancers, and DIY accountants store and organize their receipts. It quickly and efficiently digitizes your receipts and documents, then automatically extracts, categorizes, and human-verifies important data from your receipts. You can scan their receipts, manage expenses, store business cards, and track business mileage easily, helping you boost productivity and bring in more revenue. 

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