In today’s fast-paced world, effective financial management is vital for the success of every business.
From managing cash flow, payroll, to tax deductibles – you have to stay on top of all money-related matters.
After all, not having enough profits and cash available at your disposal can drown the venture into losses. Therefore, to run the operations smoothly, begin by keeping tight control on operating costs.
In most instances, high expenses and costs are the only reason why a company cannot generate profits. Therefore, monitor the cash outflows to see where the business is spending money.
Likewise, keep track of business spending to ensure employees aren’t adding bogus expenses to the list. In addition to curtailing profitability, high business costs can disrupt routine operations.
So, why not take initiatives to improve the company’s cost management? Instead of recording every business cost by the name of ‘expense,’ start labeling and categorizing them.
That way, you will know where the money is going. However, if you are having difficulty with this, let us show you the ropes. Here are some tips to categorize expenses for your business.
1. Identify the start-up costs
Most entrepreneurs mix up their start-up costs with business expenses. In accounting, the money you invest in the business is capital. In contrast, expenses are the day-to-day costs to run the company.
Therefore, identify the start-up costs and categorize them separately. You can begin by noting the one-time investments in fixed assets since they are a significant part of start-up costs. However, to do this, you should have basic accounting skills and financial know-how.
You can search for short courses or explore educational opportunities. With eLearning programs and online schools, pursuing higher education has become effortless.
If you already hold an undergrad degree, look for an online master of accounting to learn the art of managing expenses. The flexible learning experience will help you distinguish between start-up costs and actual business expenses, improving financial management.
2. Reconcile the bank accounts
Before you start categorizing the expense, start reconciling your bank statements. Maybe, if you have recorded a cost of $21,000, check it in the statement to identify the payment.
If you have charged that against utility expense, you can add one category to the long expenses list. In addition, verify the amounts of business costs. At times, the receipt might show an expense of $232, whereas the bank statements will have $323.
It might seem like a minor error, but leads would decrease your profits by $91. Having accurate records is essential to getting the categories right. The bank statements will give comprehensive details of business spending, helping you choose relevant categories.
3. Create expense categories
Usually, business owners think recording expenses collectively is feasible but creates problems in the long term, especially during tax calculation. Therefore, start creating expense categories and leverage expense management software to keep recording them accurately. Here are some of the popular headers for costs.
Advertising expenses: Nowadays, almost every business has a marketing campaign up and running. You can add a header for advertising expenses and include any amount spent on the ads. You can even create subcategories for the advertising expense. For instance, you can list digital marketing expenses, TV commercials costs, printing expenditure, etc. It will give you a detailed overview of spending.
Office supplies: Business supplies are usually tangible items like papers, pens, staplers, printer ink, and files. Even though they seem like minor expenses, they can easily make up to $2000 quarterly. So instead of paying from your pockets, list them in your expense list. You can also add the office furniture in this category since it is a part of the supplies.
Business vehicle: If you use your vehicle to ship products from one place to another, create an expense category by the name of the business vehicle. Here, you will add all the maintenance and repairs, mileage, tolls, and lease payments of the vehicle. However, avoid including any personal expense of a vehicle in the list since it can create discrepancies during tax calculations.
Utility bills: In the workplace environment, owners have to incur different utility bills. From electricity costs to internet service charges – you have to categorize every expense separately. The main header could be of utility bills. But under that, create different t-accounts. It will unfold the most costly areas of business where you can cut back costs. For instance, if energy costs are high, you can opt for solar power as a part of your development projects.
Travel expenses: Although travel expenses have reduced significantly with the emergence of digital forums, many businesses still send employees for professional tours. In that case, you have to record these expenses with all the charges, including airfare, cabs, laundry, food, etc. Also, you have to include the long-distance phone calls to these expenses since it is a part of the travel.
Payroll: Typically, wages and salaries are the most considerable expense for most companies. By creating a separate category, you can see how much this expense is costing your company. In case the payroll is skyrocketing, you can develop cost-saving strategies for the future. It will help you curtail extra fees while keeping the finances in order.
Depreciation: Do you own a business vehicle, equipment, or machinery? If so, don’t forget to charge depreciation on your fixed assets. Whether you use a straight line or diminishing balance method – create a separate category for depreciation since it is a non-cash expense. You have to add this back in the cash flow statement; hence, ensure you are calculating the correct amount.
Undeniably, companies have to incur many expenses every day, and keeping track of each of them is next to impossible. The best solution is to monitor business costs closely by categorizing them into different headers.
In addition, you have to distinguish between investment and expenditure to avoid jumbling up the financial statements. Having a breakdown of your expenses can help you see how things are changing. Also, you can zoom into categorizes where you spend more to control the costs.