Expenses are any costs made that help the business run and grow. Tracking business expenses is essential for effective financial management. Good financial management will assist your company in making the most of its resources and fulfilling its commitments to stakeholders. It also gives you a competitive edge and helps to prepare for long-term financial stability. With this in mind, you can make long-term decisions related to budgeting and employee expenses.
There are three main types of expenses you should know about when managing your money: fixed, variable and periodic expenses. They are all incurred by a business during certain accounting periods and are recorded on an income statement. In addition, it will be beneficial to keep all expense receipts to help assess your overall financial health.
Fixed Expenses
Fixed expenses are the simplest type of expenses to manage because they occur at predictable intervals, typically monthly. Since these expenses do not change, they offer stability to businesses and help with money management.
Pros of tracking fixed expenses:
- They are important when estimating a business’s profitability for a certain financial quarter
- If a business wants to enter a new market, fixed costs can determine if it is a sensible choice
- When sales fall, a business with high fixed costs is more likely to suffer a loss in profit margin
Fixed expenses include:
- Rent of office spaces
- Wages
- Salaries
- Insurance(s)
- Interest
- Flat-rate utilities
- Recurring business licence and permit fees
Variable Expenses
These expenses are directly influenced by changes in business activity levels or the number of items/services sold by your organisation.
Variable expenses fall as sales drop. For example, the cost of raw materials changes with sales. Reduced variable expenses are one method for a corporation to save money.
Pros of tracking variable expenses:
- Helps to understand the impact of fixed expenses on net profits
- Helps to manage cost control and profit planning
- Allows for management to observe and understand the impact of period expenses on profits, allowing for improved decision-making
Variable expenses include:
- Direct labour for service businesses
- Sales commissions
- Cost of resale items
- Packaging supplies
- Shipping expenses
Periodic Expenses
A periodic expense occurs on an irregular basis rather than every month. They are slightly more difficult to budget for, unlike fixed costs.
Here are a few examples of periodic expenses:
- Real estate taxes
- Car maintenance done regularly
- Regular housekeeping
- Memberships
- Car registration
- Pet care