Expenses are costs incurred in order to run your business. They are paid for by the income your business earns from sales. The costs are used in the calculation of nett profit and the taxable income. Expenses and cost of sales are often confused and used for the same meaning. They are different and they can even differ between businesses.
The payments are broken down into 2 categories with expenses being broken into 2 further categories:
- Cost of sales (Please read about cost of sales here).
Lets have a look at the breakdown a little closer.
Expenses that occur every month no matter what the income is are considered ‘fixed’. These are generally a set amount but can be variable. The distinction is that the same payments are made every month or every year. The period again can be any span of time.
- Classic example is rent paid. Almost every business pays rent to someone. This will a fixed amount monthly.
- Salaries is a variable (but still fixed) cost. This will occur when there are commission payable relating to sales made.
- Another is utilities, these may fluctuate month to month but are still paid every month.
As the name suggests, these expenses fluctuate from month to month. Fixed costs are often once off payments. Some months may not have these at all.
- Buying a new keyboard for a computer.
- Repair of a broken window
Should I be Budgeting for these?
Budgeting for expenses is a crucial part to make the business cash flow manageable. This is not complicated and should be done by all businesses no matter what the size. In terms of expenses, if you have a certain amount “put aside” for that expense, it will not cause your calculations to be altered in a negative way.
Lets have an example: Lets say that your credit departments computers are getting older and starting to give up, You should put this expense into the budget. You should also start budgeting for replacing or upgrading the machines. Because this can be a large expense, this could derail your cash flow in a serious way.
Expenses are a way of life to the business, how you treat them is important.
This article was updated in January 2022