Most business owners, especially owner-managed one wrongly categorize business expenses or don’t capture them adequately. We all know that when you are running a business, you have to manage expenses carefully. In this guide, we help provide an overview of the major business expenses and the type of expenses that most businesses incur.
What are business expenses?
Business expenses are the costs incurred in the ordinary course of business. A business expense is an integral part of an income statement where the business revenue metrics are calculated. Business expenses can also be defined as deductions in simple terms. Most businesses have a set policy and considerations when it comes to it. Most of these expenses can be categorised into two segments – fixed expenses and variable expenses. Common examples of fixed expenses are – payroll, utilities, and rent.
Types of business expenses!
When it comes to building a budget for your business, you should have clarity on different types of business expenses. Other than the two major categories of expenses – fixed and variable, there is another very important type – periodic and one-off expenses.
Let’s discuss each one of these types one by one –
This is a cost that does not vary much over a set period. There are almost fixed and are not linked to the quantum of goods and services delivered. The most common example of these fixed business expenses is – Payroll, rent, utility bills, insurance, and more.
These are the expenses that vary from month to month as per the requirement. e.g. overtime expenditures, shipping expenses, sales commissions, and raw material costs.
Total variable cost = Total quantity of output x variable cost per unit of output
Periodic expenses are the ones that happen infrequently. Planning for these expenses is the most difficult. The very common type of periodic expenses includes – maintenance & repair expenditure, major equipment purchases/upgrades, etc.
Similarly, with the explosion of cloud-based solutions, subscription costs to various systems are now a major expense. Subscription costs are now incurred for a variety of things such as finance software to CRM amongst others.
What are some examples of common business expenses?
Some common expenses that most businesses tend to incur are –
- Bank fees & interest
- Insurance expenses
- Business vehicles
- Equipment or equipment rental
- Software subscriptions
- Office Supplies
- Membership dues (including union or other professional affiliations)
- Commissions & fees
- Business meals
- Business travel expenses
- Employee learning and development
- Employee benefit programs
- Subscriptions to industry magazines
- Equipment rentals
- Advertising and marketing costs
- Office equipment
- Legal fees
- Repair and maintenance costs
- Executive compensation
- Interest expenses
- Shipping costs
- Licensing and government fees
These are some common expenses that most businesses have to take care of.
Some basic tips for expense management!
Keeping a track of business expenses is very important. Be it fixed, variable or periodic expenses, an entrepreneur needs to track all the expenses to understand the financial performance of their business. There are many ways in which you can do to manage your business finances. Some of these tips are –
- Set up a separate business bank account
- Use expense management software to automate the process
- Keep all the records clear
- Review your expenses regularly
Why every business owner should consider automating their expense management?
If you are running a business with a manually monitored expense management system such as a reimbursement system, we believe that that is a very ineffective and tedious process. The study conducted by the Global Business Travel Association (GBTA) found that processing one expense report costs around 150-200 AED ( not necessarily for SMBs) on average. Automating this process can help reduce costs and bring more efficiency.
Below, we have the list of benefits of automated expense management –
Unlike manual expense management processes, automating expense management can significantly improve the efficiency of the entire process. There are many tools and software like Paci Finance that enable businesses to keep a track of all their expenses while monitoring & planning for upcoming expenses. Automating this process eliminates manual work, increasing overall efficiency and reducing the risk of human error. With proper expense management software, you enable your employees to submit receipts online enabling decision-makers to take important decisions.
No more paperwork
Right from planning the expense budget, and expense terms and conditions, to managing receipts and budgeting, everything was done on paper, leaving a huge space for error. Automating expense management can help solve this problem. With the use of software like Paci Finance, you can easily manage all your expenses online, reducing the paperwork. With an AI-powered receipt captured, leave the data entry to Paci bots, saving you hours and hours of manual tedious work.
Faster approvals & processing
Manual expense management comes with many basic challenges – a time-taking approval process. Verifying the information mentioned in a claim and approving the claim is a very time-taking process. Thanks to expense management automation, this problem can be resolved. Using software like Paci Finance, employees can send their claims from wherever and at any time to the approvers and the approver can sign on it instantly.
Another very important reason why every business needs to get its expense management automated is – risk reduction. Earlier when the task was performed manually, there were high chances of conducting expense fraud like double entries. An expense management system eliminates the risk by flagging identical information, reducing the risk of fraudulent submissions.
Increased visibility and better analytics
Real-time spending and expense report improves visibility and increases the control of business owner over finances. With real-time information, you can create accurate forecasts and allocate a budget accordingly. This data can also significantly improve your business’s profitability.
The bottom line here is that every business should consider an automated expense management system like Paci Finance. Do reach out to us for a Demo of how we can help you with this process.