What Are Business Expenses? (With Types And Examples)

Businesses incur expenses for their daily operations, expansion and production of goods they offer. Calculating these costs helps them measure profits and gross revenue and prepare an income statement to analyse the company's growth. Understanding expenses can help you examine a brand's business model and interpret how it generates profit. In this article, we explain what business expenses are, list the different types, provide examples of different expenses and offer tips to help manage them.

What Are Business Expenses?

Business expenses sum up the costs incurred by a company or brand to generate revenue. Companies may spend money on operations, taxes, loan repayments and other activities to operate a business. You can record such expenses in the income statement and help calculate gross income and determine a company's financial planning. For example, you can subtract expenses from revenue to calculate gross income.

Revenue - Expenses = Gross income

You can record these costs in an income statement rather than when you generate receipts. For example, you can record an employee's salary based on their work hours and not when they receive their wages.

Related: What Are Administrative Expenses? (With Types And Examples)

Types Of Expenses

You can classify expenses under different categories to record them systematically in a company's financial statements. Here are the four types of expenses that occur in a business:

Fixed expense

A fixed expense is a cost that may not change with an increase in business activity, such as sales and production in a company. Businesses also label it as an overhead or indirect cost. These costs remain constant for a period, are recurring and include expenses such as rental leases, interest rates on loans and property tax.

Variable expense

Corporate expenses that change along with the number of goods and services a company produces are variable expenses. They increase as production and manufacturing increase and fall as production in a company decreases. These costs include sales commission, raw materials and labour costs.

Operating expense

Companies incur operating expenses during normal business operations related to production or providing services. These costs can be essential for the daily activities of a business. They may include expenditures such as payroll, marketing, equipment and research and development.

Non-operating expense

A non-operating expense excludes all core operations of a business. Companies incur these costs to fulfil certain monetary business obligations related to debts and the disposal of assets. Some examples of non-operating costs are inventory write-downs, lawsuits, restructuring costs and any kind of one-time charge.

Related: Asset Vs Expense: Differences, Types And Best Practices

Examples Of Expenses

Most businesses typically require investment to generate revenue. The expenses category of a company can vary depending on the industry and the business type. A manufacturer might spend money to purchase raw materials, whereas a technology company might use its investment in research and development. Here are 10 examples of expenses businesses may incur:

Payroll costs

One of the biggest expenses a company may incur is compensating its employees. These costs include salaries, payroll taxes and other liabilities towards employees. A few businesses might pay festival and project bonuses along with employee benefits such as health insurance, housing and transport facilities. Companies can benefit from a robust payroll system that compensates employees for their hard work and contribution to the company, making employees feel more valued at their workplace.

Rent or mortgage payments

Most businesses operate in leased office spaces. Some companies might own property, but many do not because of property insurance and other liabilities. Sometimes it becomes cheaper for a business to rent a space rather than purchase one. The rent or mortgage comes under fixed expense and may vary depending on the company's location. Usually, office spaces in metro cities tend to be costlier than in small towns.

Cost of goods sold (COGS)

This expense includes the direct cost of producing a product or service for the company. For instance, a construction business needs bricks, iron, cement and other heavy machinery for infrastructure. An e-commerce company might require advanced technological tools and a vast inventory to provide its services. Organisations deduct COGS from sales to measure the profit margin on each product.

COGS may not measure the final cost incurred on selling a product. For example, an automobile manufacturing company might only consider the cost of labour, machinery and tools for calculating COGS. They may exclude the cost of transportation of the vehicles to the dealership and the labour required to market and sell the product.

Related: What Is Cost Of Production? (With Factors That Affect It)

Advertising and marketing

Businesses categorise the costs associated with promoting a company's product and services as advertising and marketing expenses. Typically, brands spend on reaching customers, also known as the customer acquisition cost. These expenses include paid marketing campaigns on digital and print media or running advertisements on television. You can report it within the selling, general and administrative expense section of a company's income statement.

Loan repayments

A business may borrow from banks, investors and other financial institutions to start new projects, expand the company to new locations or increase the production of goods and services it offers. This might incur loan repayments every month. This can be an essential business expense for many SMEs (Small and Medium Enterprises) and multinational organisations.

Depreciation

Company assets such as cars, machinery and computers depreciate over time, which means their monetary value decreases. At the same time, businesses might be paying loans on these assets for a period, even if their price decreases. As a result, a company might spend extra money as equated monthly instalments or loan repayments.

Taxes

There are several taxes that a business typically pays as long as it operates. This can include property, income, employment, corporate and sales tax. Sometimes companies might pay taxes to the local authorities in a state and taxes levied by the central tax authority of a country. Certain businesses may pay more tax than others based on the industry to which they belong. For example, many governments offer subsidies and tax benefits to SMEs, whereas businesses related to liquor or multinational information technology companies might not receive such benefits.

Related: Basics Of Accounting—Terminology, Principles And Concepts

Office equipment

These expenses include purchasing furniture, stationery, desktop computers, printing machines, scanners and telephones. The cost can vary depending on the size of a company and the requirement of a business. For example, a manufacturing business may not require several desktop computers and scanners, whereas an investment banking company may depend on its computers for daily operations.

Employee training

Employee training expenses can include costs incurred in upskilling employees, financing their education, delivering training sessions and providing materials and tools for training. Employees may require training to operate new tools and technologies to accomplish projects. For this reason, companies often spend on training them to accelerate revenue.

Business insurance

Insurance covers provide companies protection against unexpected financial loss or property damage because of accidents. Businesses pay insurance for automobiles, assets and coverage against natural disasters. It is cost-effective and helps companies operate with minimal losses during unpredictable economic situations. The law requires companies to avail of insurance coverage, and several insurance contracts are tax-deductible depending on the business type.

Related: What Is A Financial Statement? (With Importance And Types)

Tips For Managing Expenses

Efficient expense management allows businesses to generate profitable revenue and reduce tax liability. Here are a few tips that companies might use for managing their expenses:

Understand deductible and non-deductible expenses

A company can subtract deductible expenses from its gross income and reduce the overall taxable income. Some examples of deductibles include charitable donations, payroll, utilities and mortgage interest. Authorities may not require companies to pay taxes on these expenses. Since you cannot subtract non-deductibles from gross income, a company's taxable income increases. These expenses include client gifts, political contributions, penalties, travelling costs and expenditure on meals and entertainment.

Create systematic expense records

Organisations can create expense records of the past four to five years of a company. Executives can analyse this data to decide how to utilise the company's expenses to increase revenue. Digital records of costs can be beneficial during internal and external tax audits and might allow a business to store information for many years.

Related: What Is A Profit And Loss Statement? (Formulas And Examples)

Monitor expenses

A business can monitor and review its expense structure regularly to conduct an audit for better management of costs. Consider bookkeeping or hiring a cost-cutting expert to avoid accounting errors and prevent fraud. A company can eliminate expenses that may not provide value, such as redundant marketing campaigns or closing off extra office spaces if fewer employees exist.

Manage business receipts

Receipts can help companies claim deductibles on expenses such as travel. Though it is a non-deductibles expense, a business can show receipts to classify it as deductible based on travel purpose and mode of transportation. Receipts can also help track various expense transactions and serve as proof during internal and external tax audits of the company.

Invest in technology

Technical tools such as business accounting software and content management systems can help you use equipment expenses in the right way. You can even turn a workplace paperless and save the company's equipment expenses. Similarly, businesses can focus on employing the latest technology to minimise errors and manage costs to increase revenue.