Expenses are any costs you incur to run your business, like buying office supplies and software subscriptions or paying employees.
Knowing how to identify and manage expenses helps you take advantage of valuable tax deductions and maintain a healthy cash flow. How so? Read on for an in-depth overview of business expenses and practical advice for optimizing them effectively.
What are business expenses?
Business expenses are costs you incur in the ordinary course of running your business.
There are many ways to look at expenses. For example, expenses might be fixed or variable, and they might be operating expenses or non-operating expenses. The expenses you claim on your tax return might differ from the expenses that appear on your financial statements.
Let's take a closer look at these different types of expenses.
Fixed vs. variable expenses
Fixed expenses remain constant regardless of business activity levels. For example, if you pay $1,000 per month to rent an office space, that's a fixed expense.
Variable expenses are monthly bills that fluctuate with the level of business activity — usually sales or production volume. For example, if you pay commissions to your sales team, your commission expense will be higher in high sales months.
Operating vs. non-operating expenses
Operating expenses are the day-to-day costs necessary to keep the business running, like paying rent, utilities, salaries, and office supplies.
Non-operating expenses aren't related to your core business operations. Examples include interest expense on a loan and payments to settle a lawsuit.
Separating operating expenses from non-operating expenses on your financial statements helps give shareholders, investors, and lenders a clearer picture of your operating results.
Book expenses vs. tax deductible expenses
Most of your expenses are tax deductible. But there are a few categories of expenses the Internal Revenue Service (IRS) doesn't allow businesses to deduct, or only allows a partial deduction.
Examples of non-deductible expenses include:
- 50% of business meals
- Entertainment expenses
- Political contributions
- Fines and penalties
- Commuting expenses between home and work
Other types of expenses
Other expense-related terms you might encounter include:
- Capital expenses. A capital expense is the cost of acquiring or upgrading physical assets like buildings, machinery, and equipment. You generally can't deduct the cost of a capital asset immediately. Instead, you have to capitalize them (i.e., add them to your balance sheet) and depreciate them over their useful life.
- Prepaid expenses. These are expenses paid in advance for goods or services you'll receive in the future. You only use prepaid expenses if you use the accrual basis of accounting. If you use cash basis accounting, you just expense costs as you pay them.
- Costs of goods sold. These expenditures are directly related to creating or acquiring the products and services you sell in your business. Common examples include materials, direct labor, and storage costs.
Categorizing your business expenses
Imagine writing down each business expense you pay throughout the year in a notebook. At year-end, it would be tough (and time-consuming) to see what you paid for insurance or taxes without going through each entry and totaling up each transaction that falls in those categories.
That's why business owners categorize expenses: sorting them into a handful of main categories makes it easy to run an expense report and see at a glance where the company is spending money.
Using a spreadsheet to track and categorize expenses might be feasible if your business is very small. But as your business grows, manual methods are tedious and error-prone. That's why most companies use accounting software to categorize business expenses and create expense account reports, financial statements, and other financial reports with the click of a button.
Categorizing expenses offers several advantages:
- Compliance and reporting. Accurately tracking and categorizing expenses helps to comply with accounting standards, simplifies preparing financial statements, and makes filing taxes easier.
- Accurate budgeting. Budgeting for expenses allows you to set goals, control spending, and save for the future. When you know where your money is going, you can create more accurate budgets and allocate your resources effectively.
- Cash flow management. Healthy cash flow ensures you have enough money coming in to pay expenses. Tracking expenses helps you identify areas where you can cut back on spending to reach your goals.
How to reduce your expenses
Tracking your expenses is the first step in running your business efficiently. Once you know how much money is going out the door each month, consider looking for ways to control costs to improve profitability.
Here are a few ideas for lowering your expenses without compromising on quality or productivity.
Negotiate with vendors and suppliers
Review contracts with vendors and suppliers regularly and negotiate better rates or bulk discounts. When your lease expires, consider renegotiating lease terms or moving to a more cost-effective location.
Outsource
Consider outsourcing non-core activities like payroll, IT support, or marketing. Often, independent contractors can perform these tasks at a lower cost than hiring permanent, full-time employees.
Make the most of your space
Are you outgrowing your current space? Instead of expanding your footprint, consider whether you can maximize the use of your existing premises. Getting rid of unused office supplies, stale inventory, and dusty paper file rooms might provide the space you need.
Leverage automation
Invest in technology to automate tasks, streamline processes, and reduce costs. For example, software can automate tracking expenses, matching bank transactions with receipts, and coding expenses to the right categories.
Tools for efficient expense management
An expense management solution like BILL Spend and Expense makes tracking and managing expenses efficient. Our all-in-one expense management solution combines free software access with corporate cards to provide you with real-time visibility and greater control over your business spending.
By streamlining expense management, eliminating expense reports, and giving your team the tools they need to document and categorize spending on the go, you'll spend less time on routine administrative work while having better control of your business expenses.
Case study: How an expense management solution saves time
Cal Wadsworth Construction, a Utah-based contractor that focuses on government projects like parks, campgrounds, infrastructure upgrades and remodels, gave employees bank-issued debit cards for making business-related purchases.
This strategy worked fine when the company was small, but tracking spending became unwieldy as Cal Wadsworth Construction grew from five to 18 employees.
“We were making purchases with debit cards and the home office didn’t know they were happening,” recalls Chris Wadsworth, Operations Manager at Cal Wadsworth Construction. “Our card statements gave us no idea what the transactions were, which job they were purchased for, or any other details. Also, it was difficult to track down receipts for every purchase.”
While the company needed to give employees the ability to make purchases on the go, it also needed to be able to properly code those purchases to particular projects so its job budgets were accurate.
Implementing BILL Spend & Expense changed the game. Cal Wadsworth Construction could issue corporate cards with pre-set spending limits to employees and require them to provide descriptions and categorize their spending. BILL Spend & Expense's integration with the company's existing accounting software meant hours saved every week.
Read more in our Cal Wadsworth Construction case study.
Find out how BILL Spend & Expense could transform your expense management
Improve your expense management process with BILL Spend and Expense and see how it can transform your business's financial health.
