Nowadays, successfully running a business is a difficult task for all the owners, founders or entrepreneurs, as 90% of startups fail in the first 5 years. Firstly, what are business expenses? Business expenses are the costs that a business incurs in setting up a business (called capital expenditures) and the day-to-day operations of the business (called operating expenses). They must be recorded in an income statement or profit and loss statement in order to calculate the net profit or loss at the end of the fiscal year.
Some of the examples of expenses incurred in business operations are rent or mortgage payments, wages and salaries, office equipment, taxes paid, advertising costs, insurance costs, depreciation, loan payments and interest payments. Every new businessman may be thinking of how to get more and more revenue from the operations, but they forget or ignore some of the important business expenses that a business is exposed to, thereby increasing the chances of failure.
The primary reason for this can be the lack of focus on bookkeeping and accounting work by these owners. According to the survey, 76% of the small businesses with less than 10 employees have a single person handling both the HR and accounting work, as compared to 59% of the small businesses with more than 10 employees.
Source: Clutch
On average, 72% of the small businesses have one person handling both the HR and accounting work.
These businesses think that the knowledge of both of these works is similar, but in reality, they are quite different. They often consider the starting costs, equipment costs, setup costs and the total lump sum figure of the daily operations. But they forget some important expenses of day-to-day operations or record them incorrectly in the book accounts because of a lack of accounting knowledge.
In this article, you will get to know the list of the major business expenses that you should never ignore to record and analyze, tips to record them in the most efficient way internally by businesses and why outsourcing bookkeeping and accounting work can help to solve these issues.
List of major expenses that businesses ignore to prepare
1.Tax Payments
Taxes are the major costs that a business has to incur, but they fail to analyze them from the very beginning and do not foresee the coming expenses at the end of the business year. The taxes are a legal requirement that every business in any country has to follow and they have to comply with the regulatory compliance of filing them on time. If you don’t know how to file them on time and the tax rebates you can get from the government, then you end up paying extra taxes and penalties.
2.Repair and Maintenance Costs
There are significant costs associated with any emergency repairs and maintenance of your machinery, building, fixtures and fittings and so on. What is not true about unexpected expenses is that they are small and thereby ignored and not recorded. However, these are the expenses that you cannot avoid and must be recorded and after that you will notice the accumulated costs of these expenses at the end of the financial year are significant.
3.Owner’s Personal Expenses
As a small business owner, you think that business money is your own money, which you can use anytime and there is no need to record this. But this is not true, in legal terms, your personal expenses or savings are different from business expenses or capital and thereby recording them differently is a need of the hour. Every time you take any money or goods from the business, you need to record these transactions in the owner’s drawing account.
4.Insurance Costs
Insurance is the cost that you need to pay to a third-party insurance provider to protect yourself from the loss of theft or any damage related to your business. You may forget or ignore these expenses to record when it comes time to renew these insurance policies.
Seven major business expenses that businesses should never ignore to prepare
5.Additional Employee Expenses
Often, business owners record the salaries and wages of their employees but ignore to record the expenses related to the welfare of the employees working in the organization, which can be Meals & Entertainment expenses etc.
6.Online Subscriptions
You might have purchased some of the accounting software—Excel, Word, inventory software—for which you are paying a meager amount as a subscription fee to the companies providing the services, which are also very important to record in the books of accounts.
7.Utility Expenses
Most often, you record the rent of the business but forget to record the cost incurred in getting the other utilities and examples of expenses can be Electricity, water & sewerage, Gas, Telephone & Janitorial services, etc. So, these expenses must be accurately recorded daily in the journal and ledgers.
How to address this issue internally or externally
What is not true about unexpected expenses in the business is that they can’t or shouldn’t be recorded daily by an internal accountant or the owner. But after you analyze and learn the importance of what are business expenses at the end of the financial year, you might see that they make up a huge cost and will affect your profitability.
1.Internally record or analyze business expenses
Here are some simple tips on how to handle these business expenses internally, which can be easily analyzed and that you were previously ignoring.
How to internally manage your business expenses
Firstly, you need to record and maintain separate accounts for your personal and business expenses to avoid any confusion at the time of reconciliation.
Second, make a yearly or quarterly budget of your business expenses that you might incur, which should include the confirmed expenses, tax amount and lump-sum amount for all other expenses that might occur.
Next is to maintain good and proper recordkeeping or hire a bookkeeper for your business to easily manage and record all the small daily transactions by following the accounting rules.
After all of this, you should know which expenses you can avoid or reduce and examples of expenses are paperwork, doing everything in-house, extra insurances, purchasing supplies from large companies, credit card interest and extra office or building space.
2.Externally record or analyze business expenses
To solve the issue of recording every single business transaction and the lack of time and personnel to do so, the business owners can choose to outsource the work to a firm that specializes in doing that.
Not only do they record these business expenses, but they also provide you with an analysis of how much you’re spending, what the major expenses are in a financial year and the best ways to reduce them. Whether you are a small or large firm, this is the most recent trend and the most efficient way to handle accounting work.
Some of the benefits of hiring an expert outsourcing accounting and bookkeeping firm such as IBN Tech are cost savings of up to 50%, time savings, expert and professional accountants and bookkeepers, customized offerings, access to automated software, advisory services and many more.
Conclusion
As a result, you must understand what is not true about unexpected expenses or major business expense transactions that you must report and analyze for the business. It is very important to record and analyze these business expenses in order to reduce them and if you outsource it to some firm, then they can bring the best out of your business, thereby helping you increase profitability every year. The more you analyze your business expenses, the more you get insight on falling revenues over the year and can thereby correct your mistakes.
FAQ
- Q.1 What are the top five expenses for most businesses?
- For most product-based businesses, the top five expenses are employee wages, location costs, capital equipment and machinery, development costs and inventory costs. But these are just the major expenses and there are other small expenses that every business needs to take care of, such as advertising, credit and collection fees, bank fees, dues and subscriptions, insurance, maintenance and repairs, legal and professional expenses, postage and shipping, printing, travel, business meals, moving expenses, depreciation, charitable contributions, licenses and permits, client gifts, etc.
- Q.2 Is the practice of managing and or reducing business expenses?
- The best practice to manage or reduce business expenses in order to increase profits is to start with proper budgeting from the very beginning. Next, separate your personal expenses from your business expenses. After that, try to pinpoint those activities or expenses that can be avoided or reduced. All this work can only be done if you have the proper bookkeeping records in place, which can be easily done by an outsourced firm for you.
- Q.3 What are the largest 3 expenses for businesses on average?
- The three largest expenses that businesses pay on average are extra insurances from more than one company for a single product or piece of equipment, overpaid taxes because of defects in the preparation of the financial statements and extra employees hired without analyzing the requirement, which leads to the extra costs. Other than that, sometimes extra advertising or marketing can also increase your costs by more than 50%.
