Explanation of types of expenses in commercial and industrial companies
Businesses bear the expenses of their day-to-day operations, expansion, and production of the goods they offer. Calculating these costs helps measure profits and total revenue and prepare an income statement to analyze the company's growth. Understanding expenses can help you examine a brand's business model and explain how it generates profit. In this article, we explain what business expenses are, list the different types, give examples of different expenses and offer tips to help manage them.
What are the business expenses?
Business expenses summarize the costs that a company or brand incurs to generate revenue. Businesses may spend money on operations, taxes, loan repayments, and other activities to operate a business. You can record these expenses on the income statement and help calculate gross income and determine the company's financial planning. For example, you can subtract expenses from revenue to calculate total income.
Expense types
You can classify expenses under different categories to record them systematically in the company's financial statements. Here are the four types of expenses that occur in business:
Fixed account
Fixed expenses are costs that may not change as the business increases, such as sales and production in a company. Companies also classify it as an overhead or indirect cost. These costs remain fixed for a period, are recurring, and include expenses such as leases, interest rates on loans, and property tax.
variable account
Corporate expenses that change along with the number of goods and services a company produces are variable expenses. It increases with the increase in production and manufacturing and decreases with the decrease in production in the firm. These costs include sales commission, raw materials and labor costs.
Operating expenses
Businesses incur operating expenses during normal business operations related to production or provision of services. These costs can be necessary for the day-to-day activities of the company. It may include expenses such as payroll, marketing, equipment, and research and development.
Non-operating expenses
Non-operating expenses exclude all of the company's core operations. Companies incur these costs to meet certain cash business obligations related to debt and to dispose of assets. Some examples of non-operating costs are inventory reduction, lawsuits, restructuring costs and any kind of one-time fee.
Expense examples
Most businesses usually require investment to generate revenue. A company's expense category can vary depending on the industry and type of business. A manufacturer may spend money to purchase raw materials, while a technology company may use its investment in research and development. Here are 10 examples of expenses that businesses may incur:
salary costs
One of the biggest expenses a company may incur is compensating its employees. These costs include salaries, payroll taxes, and other liabilities to employees. A few companies may pay festival and project bonuses along with employee benefits such as health insurance, housing, and transportation facilities. Companies can benefit from a robust payroll system that compensates employees for their hard work and contribution to the company, making employees feel more valued in their workplace.
rent payments
Most companies operate in rented office space. Some businesses may own real estate, but many do not because of property insurance and other liabilities. Sometimes it is cheaper for a business to rent a place than to buy one. Rent or mortgage is a fixed expense and may vary depending on the location of the company. Office space in big cities is usually more expensive than in smaller towns.
cost of goods sold (COGS)
These expenses include the direct cost of producing a product or service for the company. For example, construction business needs bricks, iron, cement and other heavy machinery for infrastructure. An e-commerce company may require advanced technical tools and large inventory to provide its services. Organizations deduct cost of goods sold from sales to measure the profit margin on each product.
COGS may not measure the final cost incurred on selling a product. For example, an automobile manufacturer may consider only the cost of labor, machinery, and tools to calculate cost of goods sold. They may exclude the cost of transporting the vehicles to the dealership and the labor required to market and sell the product.
Advertising and marketing
Companies classify the costs associated with promoting the company's products and services as advertising and marketing expenses. Brands typically spend on reaching customers, also known as customer acquisition cost. These expenses include paid marketing campaigns on digital and print media or running ads on television. You report them in the general, administrative, and selling expenses section of the company's income statement.
Consumption
A company's assets such as cars, machinery, and computers depreciate over time, which means their cash value decreases. At the same time, companies may pay loans on these assets for a period, even if their price falls. As a result, the company may spend additional money as equal monthly installments.
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