how to categorize expenses for small business

Businesses make money by selling goods or services. A Business can either be a small business, commonly referred to as a small to medium-sized enterprise, or a large enterprise. A small business can be a partnership which means two parties come together and invest in the business, or it can also be a sole proprietorship which means the business belongs and solely ran by one person.

For a small business to run smoothly and maximize profits, it’s important to track its expenditures. Tracking expenses in a small business creates a financial awareness of what you are spending on and where you are spending. Therefore, it’s important to categorize the expenses as distinctively as possible.

How to categorize expenses for small business?

Necessities

  1. This is a necessary category to put into consideration while marking your expenses. Though a small business doesn’t have a large number of employees with those available, they come with added expenses on top of their salaries, for example, health insurance covers.
  2. Because of the corona pandemic, many small business owners questioned if it is even important to have a physical location considering they could work from home.
  3. Unfortunately, the transition to working from home is not viable for all businesses; therefore, others will have to keep paying for rented spaces. Due to demand, rent spaces have become very expensive, making this expense category a necessity.

Insurance and permits

insurance is necessary for any business

For your business to be compensated in case of losses or damages caused by fire, theft among others, you need to subscribe to an insurance cover. Also, for you to run a business, you need permits renewed quarterly or annually depending on your small business’s state and nature.

Advertising and marketing

advertise your business

A small business needs to invest in good advertising and marketing strategies. Marketing attracts customers and eventually generates sales for the business. These strategies require money, and that makes them an expense category. These are costs attached to things like internet, electricity, water, and phone. These utilities help with the everyday running of the business. These expenses are paid monthly and form part of the expense categories.

Non-necessities

  1. This expense is incurred when for example, salespersons travel either by road, which means there will be a gas expense, or by air which means there will be costs of air tickets and accommodation.
  2. However, after the corona pandemic, most traveling was proven unnecessary since many transactions and negotiations can be done virtually.

Employee perks

perks are the biggest support for employees

Perks are the extras or informal advantages given for being an employee in a given business. These perks are things like branded merchandise, team building, among other things. These perks are an expense in the small business but not a necessity. In this case, they are offered periodically, mostly annually. Running a small business can be draining to you as a person, mostly because there is no delegation of duties. This means taking breaks you and your employees is important to help recharge. These breaks could be parties or holidays, which means they have to be budgeted for. This will mean another expense category but a non-necessity expense.

A business is termed a small business if it has the following characteristics

The number of employees

A small business has a small number of employees, but This will differ from different states according to rules and regulations put in place. Also, the number of employees will differ from other small businesses depending on the business’s operations.

Low revenue

Revenue is the income generated by the normal operations of a business. A small business since it’s operating on a small scale, its revenue will be lower compared to a large business.

Covers a small market niche

A large business is capable of satisfying a large population of customers because of the mass production of products and services. This is not the case with small businesses because their production is low; they can only satisfy a small niche of the demand.

No delegation of authority

In small business, all decisions are made by the owner, unlike in large business where authority can be delegated among executives and decisions making involves numerous executives.

Sole owned

A small business is owned by an individual, meaning there is no form of legal variance between the owner and business.

Conclusion

All things considered, it’s important to distinguish the necessities from non-necessities. Notably, most necessary expenses are fixed, which means they remain constant throughout the year. Necessity expenses can also be variable which means they change from time to time, for example, electricity and water bills. Non- necessity expenses are largely periodic, unexpected, or planned for. To remain consistent in tracking your expenditures, it’s thoughtful to come up with an approval procedure. This procedure helps to avoid allocating money unnecessarily on some of the categories.

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