Running a small business is a tough job, but it is also highly rewarding. Often, the difference between profitable and struggling small businesses is cash flow. And what is one of the important aspects to consider when thinking about cash flow? The answer is expenses.
Many business owners overlook the importance of managing their expenses, but getting the process right can save you money and improve your business’s financial health over the long term.
Here, we take a closer look at expenses, what you can claim, how to claim them, and what difference they can make to your business. In particular, we look at the mistakes small businesses make when dealing with expenses.
Table of Contents
Not Understanding the Definition of Expenses
A misunderstanding over what constitutes an expense can cause missed opportunities for financial savings. An expense can mean any number of costs associated with business activity, including the purchase of equipment, stationery, food for employees, fuel, and other items. They also include advertisement costs, electricity costs, and entertainment.
Not Being Clear About the Types of Expenses
There are three main types of expenses that businesses can claim, according to Cheltenham tax accountants. The two major categories are Overhead Business Expenses and Cost of Sales Expenses.
Overhead business expenses are the costs that are running in the background, regardless of what the business is doing at the time. For example, overhead expenses include insurance, rent, gas and electricity, accounting services, loan repayments and communications, for example, Wi-Fi.
Cost of sales expenses are also known as direct cost expenses. They are the opposite of overhead expenses. They are generated in order to make money. For example, they include the cost of ingredients for a restaurant to make meals. It is a cost of sales expense if it results in being able to sell services or products.
Not Dealing With Expenses Separately
Both of these types of business expenses need to be dealt with separately in order to maintain financial control and good financial health. It is important to see that the more your sales increase, the more the cost of sales expenses will increase, but that overhead expenses will not alter, regardless of sales. Monitor the two types of expenses in different platforms by creating different accounts and keeping separate records. Make sure that each type of expense has a separate budget.
Getting Confused About Employee Salaries
Many businesses treat employee salaries as overhead expenses since they do not alter with sales, but this is dependent on the environment. In the service industry, for instance, employee salaries are actually cost of sales expenses.
Although the practice of separating your business expenses is invaluable to the organisation and growth of your business, it can sometimes be tricky to discern which expenses belong to which category. This is very common, but it does make it difficult to work out how to apply each new expense to your financial accounting. In order to avoid making mistakes, it is helpful to consult professional accountants who can advise you on correct procedures and processes.