A Quick Guide to Business Expenses
- June 28, 2019
- By Aidan Dwyer
As every small business owner knows, sales bring money into a company, while expenses take money out. Expenses are not as exciting to talk about revenue and business potential, however, they are essential to the health of your business. In order to make the sales that all businesses strive for, you have to be willing to acquire some expenses.
Expenses are incurred during the normal operation of your business for various reasons such as production, delivery, and ordering stock. Even if you are in a business dependent on service. You still can incur expenses for ordering supplies that are necessary to complete the services you provide. Below we will look at different types of expenses that affect your bottom line on your companyâ€™s profit and loss statements.
The Difference Between Overhead and Costs of Goods Sold
Overhead and Costs of Goods Sold are expenses all businesses have to deal with despite their subtle differences. These expenses are the costs of running your business. There are two types of overhead expenses: Fixed and Variable. Fixed overhead expenses are expenses that do not change on a monthly or yearly basis such as rent, salaries, and insurance. Variable expenses, as the name suggests, are expenses that vary from month to month. Some variable overhead expenses include maintenance, legal fees, office supplies, advertising, and hourly wages.
Fixed overhead expenses can make a big dent in your profit and loss statement. Yet, they are much easier to plan. Because you know exactly how much they are going to cost and when the payments are due. On the other hand, variable expenses generally increase as a result of business increasing. For example: say your business deals with legal contracts. As your business sales increase, more legal contracts will be put out making your business very likely to incur more legal expenses.Â
Cost of Goods Sold
Costs of goods sold, or COGS,Â are slightly different. COGS are costs that are a direct result of the production of goods. This refers to costs such as raw materials and manufacturing costs. COGS commonly applies to service-oriented businesses. For example, if you are a painter, you have to purchase paint in order to provide your service.Â
The Bottom Line
Now that you have a brief overview of different expenses that your business incurs, it is important to see how they affect your bottom line. The best way to make sure that your bottom line is positive is to budget.Â
Generally, fixed overhead expenses are easy to budget for. You should make sure to plan for your businesses fixed expenses well in advance. Variable expenses and COGS are more difficult to plan for. They require you to forecast or predict how many sales you are going to makeover a certain period of time. Both improper budgeting and forecasting can result in a disaster on your hands and may even lead to every small business ownerâ€™s worst nightmare: losing money. One thing that can help you prevent this from happening is to give your business a safety net such as a line of credit to help you pay off the expenses that your business takes on. If you want to find out more about how REIL Capital can help you prepare for expenses with financing, fill out our commitment free application today.