It’d be great if all of the money flowing around your business was only that coming in, but the reality is that if you want your business to thrive you need to spend money on it.

This sort of spending, or any payment which happens for the business, is a business expense. You need to know about these, and how to manage them, because they impact on your business health and of course, your tax return.

Two types of expenses

Fundamentally you need to be concerned with two types of expenses: overheads and direct cost, or cost of sales and expenses.

Overhead business expenses are the costs that happen anyway. No matter how much business you do or don’t do, there are going to be some costs. These costs, such as business insurance, Wi-Fi bill or premises rent are pretty much set in stone. They just are there, no matter how much or little work you do. The expenses which fall in to this category will vary somewhat depending on the nature of your business.

Alternatively, direct costs fit in with the saying “you have to spend money to make money”. These are the expenses which you incur precisely because you’ve got work to do. For example, the ingredients to make the food your café serves, or the ink for the printer. This also includes equipment and technology such as computers.

So why distinguish between the two?

There are two primary reasons for treating these expenses differently. On one hand, understanding the nature of a business expense ensures you promote both financial understanding and control – you know what’s happening and why it’s happening.

The other reason is that how you record these expenses will be different. Shove them all in to your bookkeeping records en masse and you’re going to have some issues pulling them apart when it comes to your accounting.

This is where cloud-based bookkeeping software comes in. With Pandle Pro you can tally up banking feeds and upload receipts so that your expenses, whichever category they are in, make sense.

A word about salaries

So it’s pretty simple really. Keep accurate records and understand where any outgoings are actually going. This will make you savvy for tax and ensure you’re not paying over the odds.

However, where we typically find business owners can get confused is with staff salaries. These really are more of a stand-alone beast than an expense per se.

Salaries confuse things because, on one hand, they are overheads, and on the other – say in a service business – variable and due to demand. Different staff, even at different times, can effectively fall in to different categories of expenses.

Given that it would be impractical to try and record things in this way it’s best to view salaries as completely separate from these two categories of business expenses.

If you need help managing your payroll then we have an in-house Managed Payroll service which can enter everything directly in to the right part of your cloud bookkeeping for you, making it simpler.

Business expenses needn’t be complicated, but they are worth understanding.