Categorizing your business expenses is important for any business owner. This will give you, the business owner, piece of mind and important knowledge about your business. The categories will make it easy to find any financial information that you may need to about your business.
The first thing you need to think about before you categorize your business expenses is if they are capital or current expenses. Capital expenses are considered an investment that you put into your business. Capital expenses usually fall into three profiles: business start-up costs, business assets, and improvements. Your current expenses are considered anything that is not an investment in your company, but is required for the running of your business. In your current expenses, some of them will be fixed expenses and some will be variable costs. Fixed expenses usually stay the same each year, and variable costs can change within six months or sooner. Deciding these things about your expenses will give you an idea of where to start with your categories.
Business expenses or by definition items that are “ordinary and necessary” for your trade or business, can overall be classified into three main categories. These categories are fixed expenses, short-term or variable expenses, and long-term expenses.
- Fixed expenses, as mentioned earlier, are expenses that generally stay the same or fixed.
- Short-term expenses are things such as wages for part-time or seasonal workers or any expense that is subject to change before the end of the year.
- Long-term expenses are items like leases or contracts with vendors that last a year or longer.
Even though business expenses can fit into these three categories, it is hard to establish exactly where your money is going. Most businesses use even more in-depth categories to learn about their business expenses.
There are several categories you can use for expenses, and it will depend on the kind of business or trade you are in. Some categories that general businesses have are: Advertising and marketing, accounting, commissions and fees, education and professional development, equipment rentals, insurance, interest, legal and professional fees, materials and supplies, travel expenses, outside services, rent, taxes and licenses, and utilities. There are several more categories, but it will depend on your business and the expenses you have. Categorizing them makes them easier to keep track of, and the more detailed your categories are, the easier it will be to recall your expenses. Once you have your categories determined, it is a good idea to rank the expenses in descending order of cost within each group, as this will help you determine your biggest expenses.
Knowing your business finances will help you run a more successful business and make tax season easier on you. Keeping receipts of all your business expenses is also a must. Receipts are your evidential support on where your money has been spent.