Business Expenses: what they are and how small businesses can manage them by ExpenseOnDemand

Business Expenses: what they are and how small businesses can manage them by ExpenseOnDemand

Small businesses are the backbone of the UK economy. In fact, they account for 99.9% of all businesses in the UK. However, many small businesses fail each year due to cash flow problems. One of the biggest contributors to cash flow problems is unnecessary expenses.

Learning how to manage expenses is essential for any small business owner. By understanding your expenses, you can identify areas where you can save money. This can help you improve your cash flow and ultimately the health of your business.

In this guide, we will discuss what expenses are, which business expenses you can claim, and how to claim them. We will also provide some tips for managing your expenses and saving money.

What are business expenses?

An expense is a cost incurred by a business in the course of generating revenue. It can include anything from salaries to marketing costs. Expenses are recorded in an income statement, which is also known as a profit and loss statement (P&L).

Different types of expenses

There are many different types of expenses that a business can incur. Some of the most common include:

• Operating expenses: These are the costs associated with running the day-to-day operations of a business. They include things like rent, utilities, salaries, and marketing.

• Cost of goods sold (COGS): This is the cost of the materials and labor used to produce the goods or services that a business sells.

• Depreciation: This is the cost of equipment and other assets that lose value over time.

• Interest expenses: These are the costs associated with borrowing money.

• Taxes: Businesses are subject to a variety of taxes, including income tax, property tax, and sales tax.

Tax-deductible expenses

Not all expenses are tax-deductible. However, there are a number of common expenses that businesses can deduct, including:

• Office expenses: This includes rent, utilities, furniture, and office supplies.

• Travel expenses: This includes airfare, hotel, and car rental costs.

• Entertainment expenses: This includes meals and entertainment costs incurred while meeting with clients or customers.

• Marketing expenses: This includes advertising, public relations, and website development costs.

• Training expenses: This includes costs incurred for training employees on new skills or technologies.

Operating Business Expenses

Operating expenses are the costs incurred by a business in its day-to-day operations. They are short-term, recurring costs that are often paid off within the same accounting period that they are incurred in.

Operating expenses are divided into two parts:

• Selling, General, and Administrative Expenses (SG&A): These expenses encompass everything that is not directly related to the costs of producing the items that your business sells. Examples of SG&A expenses are paying rent or utility bills.

• Cost of Sales: These expenses are directly related to the cost of producing a company's goods or services. For example, the materials your business uses to sell coffee, like cups or lids, would be calculated as part of your cost of sales.

Operating expenses and cost of sales are both included in the income or P&L statement, but are displayed as separate line items.

Examples of operating expenses under SG&A:

• Utility expenses: These are expenses related to paying your utility bills.

• Office supplies expenses: These expenses are incurred for the purpose of purchasing office supplies, such as stationery, tables, chairs, and printing supplies.

• Telephone expenses: These are costs your business incurs when using either landline or mobile phones. These expenses are usually paid at the end of each month.

• Traveling expenses: These include costs incurred by yourself or your staff when travelling for official visits, meetings, and related purposes.

• Legal expenses: These are expenses incurred for using any kind of legal services.

• Insurance expenses: These are expenses for purchasing general insurance, healthcare insurance, or fire insurance for your employees.

• Advertising expenses: These are related to the promotion and advertising of your brand or your brand's products.

• Bank charges: These expenses include fees or any other amount a bank may charge for transactions carried out by your business. For example, charges applicable to cheque processing.

Examples of operating expenses under cost of sales:

• Freight-in costs: This is the shipping cost that has to be paid by the buyer upon purchase of merchandise. Any expenses related to freight-in are considered as part of the cost of merchandise.

• Freight-out costs: This includes the transportation cost of merchandise. It is associated with the delivery of goods from the supplier to the customer.

• Rental costs: This is the cost incurred for the use of rented property or machinery that provides support to production-related functions and operations.

• Product costs: This is the cost incurred to make a single unit of a product to be sold to customers. This includes costs related to direct labor, direct overheads, and direct material.

• Depreciation expenses: Depreciation is the reduction in the value of an asset due to wear and tear.

Non-operating expenses

Non-operating expenses are expenses incurred by a business that do not relate to its core operations. They are displayed after operating expenses on the income statement and are deducted from the operating profit.

Examples of non-operating expenses include:

• Interest expenses: These are the costs incurred when a business borrows money.

• Loss on disposal of assets: These are the losses incurred when a business sells an asset for less than its book value.

• Obsolete inventory charges: These are the costs incurred when a business writes off inventory that is no longer sellable.

• Lawsuit settlement expenses: These are the costs incurred when a business settles a lawsuit.

• Restructuring expenses: These are the costs incurred when a business reorganizes its operations.

Non-operating expenses can vary from business to business, depending on the nature of the business and its activities. However, they can have a significant impact on a business's bottom line.

Important things to note about non-operating expenses:

• They are not directly related to the core operations of the business.

• They are displayed after operating expenses on the income statement.

• They are deducted from the operating profit.

• They can vary from business to business.

• They can have a significant impact on a business's bottom line.

Capital expenses

Capital expense (CAPEX) is the money a company spends to acquire, upgrade, or maintain its fixed assets. Fixed assets are long-term assets that are used in the normal course of business, such as buildings, machinery, and vehicles.

CAPEX can include the following:

• Buildings: This includes the cost of purchasing or constructing new buildings, as well as the cost of renovating or repairing existing buildings.

• Machinery: This includes the cost of purchasing new machinery, as well as the cost of maintaining and repairing existing machinery.

• Vehicles: This includes the cost of purchasing new vehicles, as well as the cost of maintaining and repairing existing vehicles.

• Land: This includes the cost of purchasing land, as well as the cost of developing land for use by the company.

• Software: This includes the cost of purchasing new software, as well as the cost of maintaining and upgrading existing software.

Fixed expenses are expenses that do not change in amount, regardless of the level of business activity. Examples of fixed expenses include rent, salaries, and insurance premiums.

Variable expenses are expenses that change in amount depending on the level of business activity. Examples of variable expenses include sales commissions, shipping costs, and utilities.

CAPEX and expenses are both important financial concepts for businesses to understand. CAPEX can help businesses grow and improve their operations, while expenses can help businesses control their costs and profitability.

Important things to note about CAPEX and expenses:

• CAPEX is a long-term investment, while expenses are short-term costs.

• CAPEX can help businesses grow and improve their operations, while expenses can help businesses control their costs and profitability.

• It is important for businesses to track their CAPEX and expenses carefully in order to make informed financial decisions.

What expenses can a business claim?

Businesses can claim tax deductions for many expenses, including:

• Staff costs: Salaries, wages, bonuses, pensions, commissions, and other compensation offered to full-time employees, independent contractors, consultants, and freelancers.

• Office costs: Rent, utilities, phone bills, supplies, and other items used for less than two years.

• Travel costs: Some transportation costs, such as fuel, parking, train, or bus tickets. Travel to and from the workplace is not tax-deductible.

• Clothing expense: Money spent on clothing that’s required to do business, such as uniforms and safety gear.

• Raw materials: Things you buy to sell on, such as stock or raw materials.

• Training courses: The cost of training your employees or offering courses that are related to your business.

• Marketing and advertising: This includes website domain registration, hosting fees, photographs, brochures, flyers, and other advertising and marketing expenses.

• Insurance: Financial costs, such as insurance or bank charges.

• Food expense: Official meals with clients or employee lunches during official business travel are deductible at 50%.

• Entertainment costs: HMRC allows you to claim £150 a year per employee for entertainment purposes, but there’s no allowable expense claim if you’re a sole trader.

The expenses you can claim also depend on the type of business you’re running. For example, if you’re a sole trader, your list of tax-deductible expenses might be different from that of a limited company.

On the other hand, there are some expenses that are not tax-deductible, such as:

• Penalties: Failure to file taxes at the right time, or not being able to make bill payments on the due date, can lead to penalties that can’t be claimed as a business expense.

• Political contributions: If your business has made contributions to a political party, you can’t deduct these contributions.

• Hobby related expenses: Personal hobbies are not allowable business expenses.

To claim business expenses, you need to keep accurate and auditable records for up to six years.

How to claim Business Expenses

Here are the steps on how to claim expenses:

1. Keep accurate and auditable records of your expenses. This means keeping receipts, invoices, and other documentation that shows that you incurred the expense and that it was related to your business.

2. Add up all of your allowable expenses for the tax year. Allowable expenses are those that are related to your business and that are tax-deductible.

3. Put the total amount of your allowable expenses on your Self Assessment tax return. Self Assessment is a system that HMRC uses to collect Income Tax.

4. You don't need to share any proof of your expenses with HMRC unless you are specifically asked to do so. However, it is a good idea to keep accurate records of your expenses in case you are ever asked for them.

Summary: What are business expenses

Managing expenses properly can have both short-term and long-term benefits.

In the short term, you can save money by reducing unnecessary expenses and claim tax deductions for eligible expenses. This can help you improve your cash flow and increase your profits.

In the long term, managing expenses can help you invest more in your business and improve its overall financial health. This can lead to greater growth and sustainability for your business.