How to Categorize Expenses for Small Business
In this article, what we will be discussing, is the expenses that occur for small businesses and how we can categorize these expenses. It keeps companies and businesses well-organized and healthy. It may be done for budgeting and determining expenses that can be ticked off at the time of taxes.
So let's get straight into it. First, we need to figure out why business expenses are essential to track. Then, let's get to it.
Tracking business expenses is somewhat vital whether you are running a small or a large business. However, you will not have a 100% authentic record of your financial transactions if you do not have excellent bookkeeping. For instance, you cannot be sure about purchasing a product when you do not know its price when you purchased it.
Now, coming to the categorization of expenses for small businesses.
The first category is:
1 . Expenses for advertisements
From newspapers to radio, television, digital media, magazines, and all other types of ad expenses need to be covered under this category of advertisement expenses. Furthermore, social media, email marketing, and other similar expenses should also be covered here. While we're on that, you should also add in the entire cost of production of the advertisement in this category.
2. Business Vehicles
It's important business vehicles are part of this list because the many expenses related to the use of an automobile can add up considerably. You'll want to keep track of the amount spent on:
This particular category must be added as it also is, in the end, a relatively high expense. This category can further be sub-categorized as follows:
- Repairing and maintaining the vehicles
- Replacement of Tires
- Changes in oil and gas
- Fee & Tax Registration
- Interests on loaned vehicles
- Lease Payments
- Rent of Garage
- Expenses in Parking
- Tolls Expense
This category is crucial and highly encouraged by us to be categorized as it is primarily the most significant type of expense that a business has to attain. Calculating the amount of manpower required and seeing how much it is costing you helps you organize and scheme strategies for saving costs for the future.
4. Benefits for Employees
Ensuring that your employees are satisfied in the company they're working in is essential and beneficial to both parties. For example, suppose the employee is getting paid well and gets several other benefits and incentives besides the standard wage. In that case, they are highly likely to work hard and put in their effort and this way, the employer-employee are happy and satisfied. Several benefits can be sub-categorized in the following order:
- Medical Insurance
- Annual Leaves
- Casual Leaves
- Sick Leaves
- Child care
- Utilities Allowance
- Discounts (fitness, retail stores, restaurants)
- Retirement benefits
5. Meals & Entertainment Expenses
If let's say you have an outdoor business meeting, you could add in breakfast, lunch or dinner here.
You should also include other entertainment expenses such as giving your staff tickets to a concert or inviting potential clients to an event. Although it is often disregarded because people don't always show up, it can still be used and categorized. You can simply have a policy for this and a particular calendar schedule where the staff can simply tick going or not going.
6. Office Expenses
This type of expense is regular and occurs most of the time due to its necessity. It includes software, hardware equipment, tools, scanner, filer, printer, photocopier and other standard office equipment required for everyday use.
7. Office Supplies
Offices that require supplies for everyday use such as paper, pencils, pen, ink, printer cartridge are general items that fall under this category. In addition, office furniture can also be added to this category.
8. Professional Services
This is a category worth mentioning that comes under expenses for small businesses. The people that fall under this category are bookkeepers, accountants, lawyers, security professionals, marketing executives, etc. This category exists because all businesses and companies do not necessarily have all the resources they need, so they hire outside help, which is, and has to be, professional help.
9. Rent, Utilities & Phone
Simply put, where you start your business, meaning the location of the rented or leased out is the expense covered in this category. So whether you are working from your home or have your own land where you have established your business, nevertheless, has to be tracked as expenses are there too. Oh, and also remember to track your phone and utility bills.
10. Travel Expenses
There are many travel expenses here, like air tickets, taxi fees, food, phone calls, etc. These are basically things associated with the trip, which, in turn, is another category of expense for the business.
The 3 Major Types of Expenses
The 3 major types of expenses are as follows:
This type of expense does not vary for more extended portions of time, such as rent, vehicle leasing for you or your employees.
This type of expense varies every month such as utilities, phone bills etc.,
This type of expense is an expense that sometimes takes place all of a sudden like car repairs or an emergency trip.
Categorizing your expenses for your small business is one of the most effective ways if you want to retain money and keep a firm grip on operational costs. This in turn helps in cash flow projection and maximizing profits. Different ways of categorizing are as stated below:
- Making sure you find the proper categories for small business expenses
- Reconciliation, reviewing and analyzing your bank accounts regularly
- Take notes on what you're spending, each time you're spending
- After that categorize that transaction
For simplification of tax documentation you can select categories for accounting purposes
It can be helpful creating an approval procedure as it helps to make sure what is being deducted from your business expenses before you record it in the specific category. You can add in your staffed employees in order to create and communicate a particular procedure.
Make sure you are clear and precise to the employees to avoid errors. For you to check and get an approval of expenses you need to design a system once the team has scanned and recorded tickets or different detailed expenses in a digital file.
Business expense categories are essential. When the tax year is over, these organized business expenses help businesses save precious time on filing taxes and further increase chances of saving money.
If you are talking to investors or making financial transactions, you will need a suitable and adequately aligned estimate for your categorized business expense, all being highly organized.
There are many ways to make each step simpler, such as tracking apps for receipts, accounts software, different credit accounts, etc.
A good accounting software has many benefits. One of them is calculating and entering expenses anywhere, also through your mobile device. It would also help to keep in mind to enter all expenses as soon as they have been aligned and estimated. And after you receive your receipts, make sure to file them as well. If you let your accounting tasks gather up, it will eventually become difficult for you to get a clear-cut picture of what is going on with your finances.
In the end, you should find out why exactly it is that you need to categorize your expenses for your small business. It helps you keep your financial transactions and other transactions highly organized and find out how much money is being spent and where exactly the money is going from. The employer-employee relationship is also what keeps your business stable and working smoothly if you take care of your employees and their needs. The more your business grows and expands, the more the expenses are getting high in cost, but if you're doing well and are making a profit, it is a win-win situation. Your small business needs to have the capacity to afford all these expenses.
Categorizing expenses for small businesses can be overwhelming, but it will save you from having headaches if you set up these categories for your business expenses. When you find some deductible expenses, it helps you to pay less tax. In addition, you and your business can further find out where money is being spent, showing a more prominent and more precise picture.
Well, this is just about what you need to know about how to categorize business expenses and the ways you can do it.