When you start a business, your first concern is to make a profit. However, a business does not merely generate profit by selling more products and services. Cutting down unnecessary costs and business expenses is also vital if you want to have a good financial year.
The thing is, there are many areas of business that are overcharged and might be draining the business of money even without your notice. You need a thorough look at every segment of your business to ensure you are not overspending on any of them.
You need to conduct a timely expense audit for this so that you can keep eliminating business scenarios where you have to end up spending more money than you should.
What are Business Expenses?
Business expenses are costs incurred by the business in the course of its operations. This is necessary for revenue generation and supporting other business activities. From the supplies you get in the office to the maintenance and operational costs that it bears – all of it constitutes the business expenses.
A few examples that will help understand it better:
- Employee salaries
- Office Supplies
- Business meals
- Marketing
- Insurance
- Bank fees
- Mortgage cost that allows the business to run its business payments and closing costs
- Business meals that it sponsors with partners, clients or employees
- Rent for the physical space the business occupies. Unless the business owns the space, it has this additional cost of running office
These business expenses are recorded on the income statement to be subtracted from business revenue. This helps ascertain the business’ net profit or loss and the taxable income.
Did you know there are two types of business expenses?
- Deductible expenses
- Non-deductible expenses
The deductible business expenses include salaries, insurance, legal fees, bank fees, interest, employee benefits, utilities, rent, taxes and licenses and automobile expenses among others.
Non-deductible business expenses include fines and penalties, donations, entertainment, travel expenses, business clothes, anything illegal, goodwill, taxes, legal fees and goodwill.
Any allowable business deductions that are out of the ordinary and are necessary for the industry in which the business operates – is how the IRS defines business expenses.
Five Areas Increasing Your Business Expenses
Here are five areas in your business that you should look into when calculating your business expenses.
Dues on Permits and Licenses
There are quite a few aspects of your business for which you need to get permits and licenses. Trade license permits for using particular kinds of heavy equipment, permission for working with hazardous materials, licensing for storing raw materials in cold storage, and other areas require that you keep on renewing your licenses and permits regularly.
You might also need to acquire membership for certain premium services, and if you miss the renewal window, you often end up paying more or losing out on discounted rates.
Check your files and make sure all your renewals are conducted timely. Because if they are not, you often end up paying fines and dues while renewing your permits after the stipulated period. When the permits and licenses are essential to your business, why delay and incur extra costs? You will end up saving considerable dollars if you cut out the dues.
Maintaining Equipment
To conduct business smoothly, you need to make sure that your manufacturing unit is working flawlessly. And this can only happen when you maintain the equipment and machinery regularly. Working with outdated equipment not only slows down the process, but it can also be risky. If you do not maintain your equipment, you indirectly add to the company costs because you do not derive your investment’s full benefits.
Your production output Is lower than it should be, and you might not meet the market demand. Without regular maintenance, the machines’ longevity is markedly reduced, and they could break down quickly.
You end up paying a lot more in repairs and maybe, even a complete overhaul. You can easily avoid this considerable cost by making timely repairs during regular maintenance. Upgrading your machines from time to time also helps you to stay ahead of your rivals.
Not Investing in Automated Software
Thanks to technology, you can now conduct many business areas without constant manual supervision and minus human errors. Upgrading your business and introducing technology on a large scale with automated systems might look like a massive investment initially, but it is far cheaper in the long run. If you do not make these updates, your business slowly bleeds the money out through many channels.
Manual errors could cost you money, and it inevitably slows down the process. It also lacks the security that an enhanced firewall could give you, leaving your business vulnerable and your business account susceptible to hackers. Upgrade the computers and the operating systems, and you will need fewer people on the payroll.
Not Renewing Insurance
You must make sure that your business never runs out of insurance coverage. You do not want a costly compensation lawsuit on your hands when an employee is inadvertently hurt on the job. You might feel that your business premises are safe and there is no cause for concern, assuming the insurance premiums can wait.
However, this is an excellent risk for your business and one that will likely result in draining a lot of money. When you conduct an expense audit, make sure that your business is optimally covered so that you are protected against any more considerable expenses.
Not Hiring Professional Services
You cannot do everything yourself when you are conducting a business. As an entrepreneur, your fast task is to manage business operations. You cannot let your attention divert into areas that are not your areas of expertise. Leave the accounts to an accountant and the hardware to a specialist.
Hire a logistics manager for the warehouse and a software engineer for the technology. If you do not, then there will be constant misses in these segments, which will keep slowing down your business and cost you money by the hour.
One error in a particular department is enough to stall an entire unit’s production and is enough to cost you vast amounts of money.
With a regular expense audit, you can find out which segment needs more attention with the finances, and which areas need cost-cutting. By maintaining an average balance, your business finances will always do well, bringing the profit your company deserves.
How to Reduce Business Expenses
The best way to reduce business expenses is by budgeting and ensuring you stick to the budget. The following list elaborates the other ways you can manage business expenses effectively:
1. Plan Well
When you evaluate where your business is now and where you want to see it in the future – you automatically start thinking about how to manage the funds. It is also necessary to properly forecast expenses so that they can account for contingencies.
2. Track Expenses Diligently
Look at your previous expenses and plan accordingly for the future. This requires gathering data (old documents.) Tracking your costs beforehand will help smoothen your ongoing operations.
3. Set a Budget as Per Your Industry
Metrics that are meaningful to your business should help effective financial planning. Set metrics that are meaningful to your business. Compare it to those that other companies use.
If the expenditure is more in certain categories, investigate the ways to curb this expense and take appropriate action. This reduces the costs to industry norms.
4. Control Fixed Costs
One of the areas of business expenses that people get complacent about is fixed costs. These are recurrent, for instance, it may be a reflection of long-standing relationships with your vendors and suppliers.
It is a historic percentage of the potential costs and the benchmark you use to keep these costs in line with selling activity.
5. Invest in Technology
Exploring new technologies that can help facilitate your process and save money wherever possible is what this tip suggests. Think of preventing damaging costs in the future by trying to retrieve data on a hard drive or physical documents.
With technological integration such as cloud computing, you can easily save that cost.
Wrapping It Up!
That was all about the business expenses that you may expect as an operating business and all the ways you can curb the expenses. There are many areas of business that are overcharged and might be draining the business of money even without your notice.
This article helps you take care of the business expenses that may get out of control when you’re trying to expand your business. Running a business and staying within a budget is not impossible – it’s definitely hard but possible!
Read Also:
