Just like profits are a necessary part of businesses, expenses which are another side of profits, are an integral part of businesses. To run an organization means to incur expenses before you can reap profits.
The aim of every organization is to make sure that expenses are less than sales so that the net profit, that is net sales minus expenses is equal to Net profit. Organizations either try to reduce expenses or increases sales so that the bottom figure increases. Running a business requires spending money on various activities, which means expenses.
For example, in an IT firm, there will be expenses of installing computers, internet connection and even salaries of employees. So, the company hires a person who can work to sell their products or services at an amount which takes care of all the expenses. Thus, a business expense is defined as the money incurred by the company on various activities necessary to run the company and generate profits.
Followings are the types of business expenses incurred in most businesses.
1) Wages and salaries paid to workers and employees
A big sum of money is spent to pay employees as per the payroll system. This includes all wages paid to the permanent and temporary / Contract based employees. In addition to monthly wages, other benefits such as bonuses are also to be paid to employees to keep them motivated. Wages make a big part of a business expense. It is advisable to set up a payroll system in advance to avoid complexities later on.
There are third party companies which help organizations to set up a payroll system but many organizations these days have an in-house payroll system managed by the finance department.
2) Location cost
Location costs are the types of business expenses which are usually categorized into further three types. The three types of location costs are mentioned below.
a) Rental cost
Businesses require a place to operate which almost always requires a cost to pay. Rent paid for the office location is one of the types of expenses which also makes a big part of the Monthly / annual expenses. It must not be forgotten while preparing a monthly/annual budget. It also includes the cost of exclusive location for some special event. The advantage of getting a place on rent is that it can be vacated if the business doesn’t work out without any major loss while the disadvantage is that rent keeps on increasing with every financial year.
b) Mortgage Cost
Mortgage cost is a type of business expense which is a loan that a company acquires from authorized banks to buy a piece of land for office or factory location. The cost of a mortgage in the office building is also to be included in the annual expenses. The advantage of mortgage is that you will get money instantly. However, interest rates are quite high which is a disadvantage, because you will end up paying more.
c) Leasing cost
Sometimes some people lease a location from the owner to set up their business. Location can be leased for any period of time such as 5 years. You can set up your business by leasing property for a fixed period of time. The advantage of leasing property is that the rental cost will remain the same for the entire period whereas the disadvantage is that you can not leave the place before the end of the decided time period.
3) Accounting and Banks expenses
Accounts and Banks are the types of business expenses, which are essential parts of every business. It is important to maintain the record of every day’s expenses and profits. Handling accounts is a complex task which requires a big team.
In addition to a manual workforce, the company needs to buy accounting software which is also an expense in this category. Sometimes companies hire an IT expert to create customized software as per their requirements. A charted accountant is also employed to balance the quarterly/half yearly / annual account sheets to maintain the transparency in the transactions. However, only big firms hire a charted accountant and pay them monthly. Otherwise, small firms only employ charted accountant once a year totally their accounts.
4) Education and training expenses
These types of business expenses form a substantial expense on an organization which is the expenditure of educating and training their employees. Technology is rapidly changing and with the emergence of new technology, the ways of doing work are also changing.
Therefore, a company requires to spend a handsome sum of money to provide training courses to the employees. Few companies have their own training department which costs extra expenses and company needs to pay monthly salaries to the trainers.
Otherwise, companies send their employees to external institutes to take some special training course which is also a big expense. At times companies also require demonstration material in order to train the candidates, which is again categorized under Education and training expenses.
5) Office expenses
Offices expenses are the type of expenses which are necessary to run an office such as, internet service, website, domain name charges, rented software, hardware cost, cloud storage services like cloud, BOX, Onedrive etc. Mobile phone and laptop expenses can also be included in the office expenses. Salaries of the office boys, sweepers, electricity bill etc. are also included in office expenses.
6) Office supplies
Office supplies are tangible traditional office things which are necessary to run an office such as paper clips, paper, pen, pencil, stapler, CDs, USB drive, printer ink cartridges. These supplies are consumed quickly and required to be filled every month. Other than traditional office supplies, there are office cleaning and janitorial supplies, office furniture, and their maintenance supplies etc., which can’t be avoided. A separate budget is kept for these types of expenses.
7) Business Insurance Expenses
Business is at risk from the very first day of its beginning. A single mishappening or lawsuit can ruin the business. It is advisable to buy insurance before making any profit from the business. There are various types of insurances such as property /causality /liability /worker compensation/vehicle insurance required to cover future catastrophic events like fire, earthquake etc. At first, these insurances might look as additional expenses, but these will act as a savior during emergencies.
8) Network and communication expenses
Network and communication have become an integral part of every big and small organization. A great sum of amount is spent on the IT department for the establishment and maintenance of computers network. Establishing an IT department is expensive work and requires a lot of recurring finances. These expenses should be considered while preparing an annual budget. Wages of IT experts will also fall under this type of expenses.
9) Delivery and freight expenses
Delivery and freight expenses are inevitable expenses in any business. There are so many supplies needed to be delivered from the suppliers which cause delivery and freight expenses. In addition to that, the expenses of courier and postal charges are also incurred for sending documents and files from one branch of the business to another. Therefore, it will be a sensible step to keep a small amount of budget for these types of business expenses.
10) Cost of goods sold
There is always a small amount of expense for every unit sold. These types of expenses are a bonus paid to the employee for every unit sold plus the expenses occurred such as storage expense, packaging expense and delivery expense (for example, fuel, commuting charges etc.). This is termed as the cost of goods sold. Usually, every company tries to price their product in such a way that it takes care of these expenses and generates a decent profit.
11) Advertising and Marketing expenses
Advertising and marketing types of business expenses are one of the biggest expenses done by any organization. In the present cut-throat competitive environment, it is very important to advertise and market the product properly. So that people can become familiar with the kind of products sold and the services provided by the company. There are different platforms to advertise products and services such as television media, social media, newspaper, handouts etc.
12) Laundry expenses
Another small type of expense is laundry expenses. These types of expenses are small but recurring expenses. It is important to keep the working environment neat and clean. Therefore sheets, curtains, and other things are to be get washed regularly.
13) Utility expenses
Utility expenses are the expenses spent on electricity, water supply, heat, gas, and sewer. These types of expenses are mixed types of expenses fixed amount with a variable amount based on the usage.
14) Gifts, meal, and entertainment expenses
These types of expenses are extra expenses that a company spends to keep its employees happy and motivated. Usually, a company provides one time of meal to its employees which incurred extra expense on the organization.
Other than that, companies give gifts to its employees on various festivals and on their birthdays, which is not directly beneficial for the company but this gesture makes the employer and employee relationship strong and also increase the employee’s loyalty for the company. Annual parties such as new year’s party or Diwali party are some of the entertainment expenses.
The above were all the different Types of Business Expenses which are made by an Organization. These expenses have to be made by organizations to achieve their goals and to grow forward.