Many individuals make the shift to running their own businesses. Therefore, some worry about the different business expense categories that come with running their business. Each business sector has its own set of expenses that normally associate with a particular industry. These individualized, line-item based categories usually develop when the initial accounting system is set up and is included in the chart of accounts. However, a business owner can consider their current business model and their day-to-day activities to identify the expenses incurred on a normal basis based on their industry. For example, truckers would not have the same business expenses as a baker. They would be distinctly different because their business activities are different.
But, there are some similar business expenses that exist in all business sectors. Below is information about different business expense categories and how to use them to control your company’s finances.
What Are Business Expense Categories?
Business expense categories are a group of normal and necessary business expenses that are necessary to run your operations.
- Most small business expenses are those that are necessary to effectively operate a business on a day-to-day basis.
- The IRS recognizes that certain businesses have activities that are specific to their industry and necessary to run their business.
- They, as a result, allow business owners to use such expenses as a tax deduction. Including those that do not have a direct effect on cash, such as depreciation, which is an expense for the loss of value on capital purchases.
Who Needs Business Expense Category the Most?
All businesses sectors need to have business expense categories that reflect the business activities that take place. Having relevant business expense categories is unavoidable. It is a way in which business owners can track and report how much they are spending. This is only to perform the activities that they need for operating their business.
Business expense categories help business owners to be more efficient. This is by allowing them to see how much is being spent monthly in each area to perform their jobs. They can use this information to make any necessary adjustments to save money while still operating their business continuously.
How Much Is Usually Spent in Combined Business Expense Categories
It’s hard to say exactly how much is spent on various business and categories because there are several factors that come into play in a wide variety of business sectors. However, if the expenses within the combined business expense categories are higher than the total revenue, then the company will be operating at a loss.
- If an expenditure is classified as a business expense as opposed to cost (as in cost of goods sold) it is considered a general and administrative expense. These include expenses to cover monthly reoccurring expenses. These can be office rent, supplies, consulting and professional fees, insurance, depreciation on capital equipment, subscriptions utilities, salaries and so forth. These individual line items make up the business expense categories.
- Although the average overhead rate within the U.S. is 52% for typical business expense categories, this number is based on several different factors.
- According to Grant Thornton, a large accounting firm, overhead rates can vary from anywhere between 20% to 130%. They also tend to be lower at larger companies because of economies of scale. This means, that they are capable of spreading their expenses across larger volumes at one time.
6 Ways to Reduce Spending in Regular Business Expense Categories
There are many ways that businesses can reduce their spending in normal business expense categories. However, this varies based on a wide variety of factors, such as the sector the, the location and a host of other factors. More specifically, however, you determine it by how a company operates its business and its ability to identify areas where obvious expenses you can trim down. Some of the main ways to reduce the expenses consist of the following:
1. Create More Efficient Systems and Automate Them
This allows business owners to identify areas that create waste. They can also eliminate those areas while speeding up the process through automation.
2. Reduce Salary Expenses
The easiest way to do this is by eliminating poor performing employees and bringing on consultants. Also consider utilizing sites such as Guru, Fiver, Upwork and similar providers designed to offer independent contractors who assist with various projects.
3. Reduce Payroll Taxes
You can do this as indicated in item 2 above. This reduces the amount of employer payroll taxes that are due and has also been known to save companies a significant amount of money by working with independent contractors.
4. Modify Traditional Marketing and Advertising Strategies
You can include more digital marketing strategies, which you can perform online. This not only saves companies money, but it also helps them reach more people by implementing strategic marketing tactics.
5. Monitor Financial Reports on a Regular Basis
Then, try to identify business expense categories that are too high. In doing so, business owners can create budgets for each area and work diligently to operate within those budgets. Monitoring financial reports will allow them to gauge whether or not they’re going over budget.
6. Reduce Your Overall Income Taxes
This is possible by implementing tax strategies during the year. By working with a tax accountant, tax specialist or a CPA, you can have customized tax strategies developed during the tax year. They focus on how you operate your business.
By working with a tax professional, you will be able to identify ways that can help save money in taxes after making strategic changes to the way you run your business.
To Sum Up
You can determine your business expense categories based primarily on your normal day-to-day business activities which you will find typical for your particular industry. It’s also important to work smart and find ways to reduce costs that associate business expenses to increase your overall bottom line.
However, if you are having challenges making the necessary shifts to reduce your business expenses, or if you have some additional knowledge that could be helpful to our readers please feel free to leave a comment, or join our group on Facebook. We look forward to hearing from soon.