Expense is the cost of running a business. This includes money spent on items such as rent, office supplies, and salaries for employees.
An expense can also be an expenditure whose benefit is finished or enjoyed immediately or within the period of one accounting year.
The dollar amount of the resources used up by the firm during a particular period of time in earning revenues.
For example, if a company chooses to spend $1000 on marketing or advertising campaigns for their products and services, then they have spent an expense of $1000.
Categories of Expenses
An expense is broken up into two main categories: operational and capital.
Operational expenses are the costs associated with everyday running a business, including marketing materials, salaries for employees, rent on office space, etc.
Capital expenses are the costs associated with making major purchases of equipment and machinery required by your business, which will last longer than one year.
Examples of Business Expenses
Some examples of business expenses include:
- Cost of goods sold
- Salaries and wages
- Rent to occupy a space for conducting company operations
- Utilities such as water, electricity, or gas bills related to the office location.
- Cost of advertising to generate business.
- Office supplies and equipment
- Mergers, acquisitions, or development costs associated with business expansion.
Why Should You Be Aware of Your Expenses?
Spending money is quick and easy. However, it can result in a significant amount of waste if not properly managed. To avoid becoming wasteful or irresponsible with company funds, here are some good reasons to keep track of your business expenses.
1) Expenses are used to determine the true profitability of a business.
In other words, if you can’t keep track of your spending, how will you know whether or not your business is truly profitable?
2) Expenses can help you identify precisely where your business is wasting money.
For example, if you are paying too much rent on office space or buying supplies in bulk that are never used up before they expire, these costs will add up over time and hurt the bottom line of your company’s profits.
3) Expenses can be used to determine the future of your company.
For example, if you are spending too much money on marketing campaigns and not generating enough revenue as a result, this will tell you that there is room for improvement; perhaps it”s time to revamp or rethink your marketing strategy altogether.
4) Expenses can be used to help you keep your business running smoothly.
For example, keeping track of how much money is being spent on supplies means that you won’t run out of certain items and disrupt the workflow or productivity of your employees.
5) Expenses can be used to help you keep up with your competitors.
For example, if a competitor is offering certain discounts or deals on products that are similar to yours, knowing how much they charge for these items will allow you to price match and remain competitive in your industry.
Tips & Tricks to Reduce Expenses
There are several ways you can lower the amount of cash that a company spends during any given financial year. Here are some simple tips and ideas which might help:
a) Be aware of how many employees you have, as this could affect your bottom line significantly.
b) Keep track of how much money is spent on supplies, as this will help you determine when it’s time to purchase more.
c) Try not to spend too much in one place; instead, try spreading out expenses across several different categories, so they don’t add up all at once.
d) Purchase items that can be used for multiple purposes whenever possible. This will save you money and space, as well.
e) Try to buy items in bulk when they go on sale; this way, you can purchase more for less money and avoid having to pay full price later on down the road.
f) Purchase high-quality products whenever possible so that they last longer. This results in spending less per item overall because it reduces how often you have to replace them with new ones altogether.
g) If your business is based online or doesn’t require a physical office location, try choosing an affordable web hosting plan instead of renting out expensive real estate for your company headquarters/ offices/ etc.
An expense can be a helpful tool to determine your company’s profitability and whether or not it is truly making any money.
It can also be used to identify where your business is wasting money, learn more about the health of your company’s bottom line, and help you keep track of how much cash you are spending at any given time.
Using expenses as a tool rather than ignoring them altogether or being wasteful with them on accident will make it easier for companies to save money in the long run while remaining competitive within their respective industry.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.