Making sales and bringing in money is among the most enjoyable parts of running a small business. Revenue is a proof of concept for your business idea. It shows that people are interested enough to pay you for what you’re selling!
But running a sustainable small business requires more than just bringing in money. It also requires keeping track of your expenses. If your expense-to-sales ratio isn’t good enough, it may not matter how many sales you make.
From your insurance payments to your marketing costs, tracking and understanding your small business expenses is crucial to your success. This article will explore some of the most common expenses related to running a small business and how you should categorize them when trying to get an accurate picture of the expense side of your business.
Cost of Goods Sold (COGS)
All businesses incur costs related to the sales they make. These expenses are referred to as “cost of goods sold” (COGS). When you evaluate your business expenses, you want to add up the total amount of money your business paid out for the manufacturing or production of the products or services you sell. Depending on the type of business you operate, these expenses may include items purchased to resale, raw materials purchased to construct the products, labor, and packaging.
Inventory and materials are simple examples of variable costs. If your business is a pizzeria, you’ll spend money on inventory and materials like flour, cheese, and sauce. The more pizzas you make and sell, the more of this inventory you will need.
Of course, not all businesses have inventory. If your product or service is intangible, like YouTube videos or personal coaching services, inventory may not even be a cost your business has to worry about categorizing.
Shipping and packaging
Another example of a variable cost is shipping and packaging. Say your business is running an Etsy store or selling goods on another online marketplace. Your shipping and packaging costs are going to depend on the volume of products that are being ordered. You could be spending significantly more on this expense category during busy times.
Your small business will incur several expenses that don’t change frequently, regardless of the number of goods you sell or services you provide. These overhead costs aren’t always set in stone, but they are recurring expenses unrelated to your production or revenue levels.
Because overhead costs are recurring and consistent, they’re not as easy to change during slow periods. Having a handle on your baseline fixed costs is crucial since it sets a floor for how much your business needs to operate daily. Below are some examples of overhead-cost standards across many companies.
Insurance is another prevalent fixed cost for a small business owner. Depending on the type of business, your insurance needs include general, property, and professional liability insurance. If your small business has employees, you will likely be required to carry workers’ compensation insurance. Other insurance policies small businesses commonly carry include business income insurance, commercial auto insurance, and data breach or cybersecurity insurance. If your business is operated out of your home, you may also want to carry home-based business insurance.
Regardless of the exact type of coverage your business carries, insurance is an example of an expense with regularly scheduled payments and thus represents a fixed cost.
Rent or mortgage
Monthly rent or mortgage expenses are an example of a fixed cost. The amount your business pays for its office space is a regular expense that doesn’t change frequently. It’s a consistent cost that will likely be part of your monthly budget, whether it’s mortgage payments towards a commercial space owned by your business or rent on an office or other work environment.
With so much work happening remotely, your business may not be paying monthly rent or mortgage fees. If you are working out of your living space, that cost would be classified as a personal expense rather than a business one (although you could claim a home office deduction on your taxes).
Electricity, water, gas, and other utilities are typically categorized as fixed costs. Many businesses also classify regular internet and phone costs as utility costs. Although utility costs vary depending on usage, they are generally a consistent, ongoing expense that only depends on how much your business produces or sells.
Salaries and wages
Employee salaries are also considered fixed business costs. A salary is, by definition, a regular payment made to an employee for working their normal hours. These payments are typically expressed as an annual amount, although they are often paid bi-weekly.
Wages paid to workers for time worked outside their regular hours (such as overtime) could be considered variable costs (covered in further detail below). Similarly, wages paid on an hourly basis to contractors or freelancers could be an example of a cost that changes depending on the production and activity level of your business. Because these costs vary, some companies would categorize them as variable costs.
License and permits
Depending on the license type, licensing and permit fees can fall into either the fixed or variable cost category. Some licensing fees (for example, a vendor’s license from your city or state) may need to be renewed on a regular, set schedule. Costs related to such a license would be fixed. The need for other licenses and permits — those purchased per-project basis, like a plumbing or construction license — might vary depending on your workload, meaning you should categorize them as variable costs.
The money you spend on the basic supplies needed to keep your office running is an example of an operating expense. The paper you print receipts and invoices, the folders you use to file away copies of those receipts and invoices, and the labels you use on those folders are all examples of office supplies.
Equipment maintenance and repairs
The cost of repairs and maintenance on your office or work equipment — when the printer goes down or you need to repair a piece of furniture in the office — is another example of an operating expense. This type of expense can sometimes be confused with a capital expense; if you’re performing maintenance on a longer-term physical asset of your business (like the company van), you may end up categorizing that as a capital expenditure rather than an operating expense.
The money you spend on the software programs that help your business run is an operating expense. This can include running your website, the cost of anti-virus software, or your subscription to Salesforce or Shopify.
Another example of operating expenses is professional fees. This can include fees for any professional associations you or your employees belong to and fees for any professional services you retain, like an attorney, accountant, or other advisor.
Taxes and Fees
Another expense category your small business will face is taxes and fees. Sometimes, you’ll pay these to local and federal government agencies. Some categories of government taxes and fees you’ll pay include the following.
The federal government, and many states, will tax your business revenue. The specific type of income tax you’ll pay will depend on the structure of your business (for example, a small incorporated company will pay tax on its earnings, while a partnership or an S-corp will “pass through” most of its profits to the owners or shareholders). But no matter the structure, you will be responsible for income taxes.
Business license fees
Many states and municipalities require business licensure for a wide range of activities. Whether running a food truck, a personal training business, or an HVAC repair company, you’ll likely need a business license. Depending on the type of business, you may also need to account for the expense of renewing that license periodically.
If your small business has employees, you’ll also be responsible for payroll taxes. You will be required to pay FICA and unemployment taxes, and you’ll also have to withhold a portion of your employees’ income to pay their federal, state, and local taxes.
Most small retail businesses will also be required to collect and pay sales tax (on behalf of your customers). The specifics will vary depending on what your business is selling, where you are located, and, sometimes, where your customers are. You’ll first need to determine whether your business is required to collect these taxes; if you are, you’ll need to figure out the appropriate tax rate for your area and start collecting that money from your customers at the point of sale (so that you can report and pay it to the state or municipality where you’re located).
Unlike overhead costs, discretionary costs are optional items a business can choose to spend money on. These costs can also fluctuate, making them variable costs. These expenses often change depending on the activity your business is conducting or the number of goods it produces and sells. Variable costs generally increase as your business’s activity rises and fall when it decreases. These expenses also represent areas that are easier to modify quickly; you can pull back or accelerate your variable costs faster than fixed costs.
The line between overhead and descretionary costs is not always black and white and can depend on the specifics of your industry and other factors particular to your business.
Marketing and advertising
Marketing and advertising expenses fall into the variable costs category for most businesses. These costs can go up and down depending on your sales, although sometimes in different patterns. For instance, your marketing budget may increase as sales increase because you can access more capital. Conversely, declining sales could motivate rising advertising costs to increase business.
Travel and entertainment
Like your marketing expenses, money spent on travel and entertainment should generally be considered a variable cost. These costs are likely inconsistent, recurring expenses, and they may fluctuate with your sales and production. For example, during a slow sales time, you may pull back on your entertainment budget to rein in costs.
Of course, even the best research and planning can’t prepare you for every possible type of expense. But when running a small business, expecting the unexpected is probably a good idea. Here are some of the more common unexpected costs.
Your business has at least one piece of equipment you rely heavily on. Whether that’s your work truck, laptop, or power washer, you must be prepared to spend money quickly if it goes down.
Most small business owners don’t have legal representation on retainer and don’t think very frequently about the prospect of getting sued. But it represents a genuine possibility; whether it’s an unsatisfied or injured customer, a current or former employee, or a business competitor bringing the claim, expenses related to legal disputes can add up quickly.
Market forces can certainly impact small businesses beyond their control. Changing interest rates, rising inflation, or even fluctuating currency valuations can dramatically change the demand for your products and services.
With Remote Quality Bookkeeping, You Can Manage Expenses and Weather Any Storm
Understanding and managing your expenses is an absolute must for any small business. An accurate picture of your business’s current and projected expenses and revenue gives you the foundation you need to understand your best path forward. Is now the time to invest and grow? Or is this a period for budget tightening and proceeding with caution?
Remote Quality Bookkeeping can help you fully understand your business’s current financial position, giving you an accurate basis from which you can more confidently forecast the future. Check out our service offerings today if you need bookkeeping, accounting, or payroll assistance.