Expenses can be defined as costs incurred by an individual or a business when buying a service or product. Businesses need to include expenses when drafting their budget. This helps the management team devise ways to cut expenses and maximize profits. Some expenses are essential to business functions, so you must be proactive and save first for them. The four main categories of expenses that businesses incur are; capital, operational, non-operational, and variable expenses.
1. Capital Expenses
These are the expenses a business incurs when buying or upgrading physical assets such as a car for business operations. Owning a car doesn’t come cheap. According to Pete Grieve, as of September 2022, the average cost of owning a brand-new car was $50,000.
However, most Americans prefer buying used cars. According to Autolist editorial, the average cost of a used car is $34,429. This is a lot of money, so you must save first or get financing from a money-lending facility. To get financing, you’ll first need to make a down payment.
Your down payment will depend on the type of car you wish to purchase. Many lenders have a set minimum amount you can pay as a down payment. In most cases, you’ll be required to make a down payment of 20% for a new car and 10% for a used car. However, if you pay more than the minimum, you enjoy the benefits of lower monthly payments and interest rates.
If you thought buying your car was the only major expense you would incur, you were wrong. You also have to consider the additional costs. According to Bankrate, the additional annual costs of owning a car can add up to $10,728. Therefore, as you work towards owning a car, you must save first for any additional costs. Such costs may include;
Auto insurance: A car insurance service helps to cushion you against damages caused to the car. It’ll also pay for your treatment should you get into an accident. Insurance also cushions you against third-party financial liabilities.
Maintenance costs: How often will you need to have a car oil change? Consider getting a car whose maintenance cost is within your budget. According to Jack Keebler, the number of times you change your car oil will depend on several factors. These include the make of the car and your driving habits.
Road services: These services include; car tolling, jump starting, parking, and washing services. Although not as expensive, including these costs in your budget is important.
Saving is more challenging than it seems. It’s more complex than setting aside some money each month. Here are a few tips to help you save first for a car for your business:
Limit unnecessary spending: Saving up for a car is a significant financial commitment. Therefore, you must ensure no money is wasted on things you want rather than need. This means that you may have to cut down on the number of times you eat out, counsel a subscription you could do without, or forego that designer watch you were caving for. Channel all this extra money towards saving for a car for your business.
Develop a savings plan: A plan will give you a clear view of what you’re working towards. It’ll help you determine the exact monthly amount you need to save first for your car. Karen Bennett recommends opening a separate savings account for your car savings. It’ll help prevent you from withdrawing this money for other uses. Moreover, you could issue a standing order with your bank to ensure money is transferred to the savings account before it reaches your hands.
Sell or trade in your old car: If you already have a car and you just want to upgrade it, you may decide to sell the old car and use the money to make a partial payment for the new car. The only drawback to selling your old car is that finding the right buyer may take time. Therefore, if you want to speed up the process, consider trading it in instead.
Saving for purchases, whether personal or your business, requires an intentional approach. These tips will help you save for that new car or truck you’ve been eyeing for your business. You can apply these tips to other capital expenses
2. Operating expenses
As a business owner, you should also save first for operating costs you’ll incur in your day-to-day activities. The specific type of operating expenses that your business incurs depends on the nature of your business. Since these expenses are deducted from the business’s earnings, you should make an effort to cut down on these costs as much as possible to realize bigger profit margins. Examples of operating expenses include;
Legal fees: At some point, you’ll need legal assistance for your business. According to Forbes, the amount lawyers charge ranges between $50 to $100 per hour but could reach up to thousands of dollars depending on the nature of the issue being addressed. Therefore, you need to save first for any legal issues that you would need to be sorted out. There are a number of reasons you may need a lawyer
When establishing your business, you must comply with set rules and regulations. A lawyer will help you navigate all the legal requirements in your state. If you’re venturing into business with a partner, a lawyer will help you set rules and clearly outline the rights and roles of each partner to help mitigate any issues that may arise in the future.
You’ll also need a lawyer when dealing with contracts. Before signing any contract, you must hire a lawyer to help you understand all legal terms included in the contract. They’ll also help you determine whether the contract is worth your investment.
Accounting fees: Accounting is essential in business, especially during tax season. It’s an expense that’s inevitable. Therefore, you’ll need to save first for money that’ll be used to contract tax accountants, auditors, and all other accounting professionals. Accounting is important in business for several reasons.
First, it helps evaluate business performance. By comparing your current accounting records to previous ones, you can gauge whether the business performance is improving, stagnating, or declining. Accounting also comes in handy when creating a budget. Based on the history of your accounting records, you can create an informed budget to help you save first for future projects you wish to take on.
Repairs: Every once in a while, you’ll need to hire the services of siding contractors for replacements, appliance repair, and installations. The amount you’ll spend on repairs varies with the extent of the damage and the materials needed for the job. It’s best to save first for these expenses before a need arises.
Salaries and wages: Salaries are monthly expenses you can’t avoid. Wages are hourly expenses companies typically incur when paying contractors. For example, you may hire a lawn company to help trim the grass on your lawn or a local pest control company to exterminate pests.
Rent: If you have leased the property on which your business operates, you need to save first for the money you will be using as rent, at least for the first few months. Rent is classified as an operating expense as it directly impacts business functions. For example, when you have yet to pay rent or accumulated rent areas as a business, the property owner may shut down the business until you clear your debt.
3. Non-operating expenses
These are expenses separate from the business’s core operations. Also referred to as peripheral expenses, these expenses consist of recurring expenses such as;
Cost of relocation: Moving your business from one geographical location to another comes at a cost. Examples of expenses you would incur include transportation, recruitment, and employee relocation allowances. You’ll need to cover these expenses before you can start operating again.
Interests payments: If you take out a loan, whether when starting your business or for expansion purposes, you must repay the interest it accumulates. Interests don’t directly affect the operations of a business.
Restructuring costs: You also need to save first for costs associated with restructuring personnel or business operations. This is because it is an undertaking that’ll lead to additional costs such as incentives, redundancy packages, or new salary bonuses. While restructuring affects the business’s daily operations, they’re short-term expenses, falling under non-operating expenses.
Loss due to disaster: The risk of a natural disaster striking is always eminent; If uninsured company property gets damaged in the chaos, the business may suffer a loss. Therefore, you need to save first to mitigate such risks proactively.
4. Variable expenses
These are expenses directly impacted by how a company produces or sells its goods; they rise and fall when production increases and falls, respectively. Examples of such expenses include; the cost of raw materials, sales commissions, utility costs, shipping freight, and direct labor cost. Analyzing variable costs helps to determine pricing, helps in budgeting and planning and helps to determine profit margins and net income.
Cost-effective Ideas Businesses Use to Reduce expenses
Consider what tasks or processes you could outsource within your business. Outsourcing will allow your employees to focus on key functions of the business and increase productivity. This is a cost-effective idea that small and big businesses can use to increase efficiency and realize bigger profit margins. Additional benefits of outsourcing include; increased efficiency, reduced risks, helping the business grow, and giving you access to the latest technologies.
Leverage automation can also help you reduce expenses. Some functions within the business take up too much time. Such functions include sending out invites and filling out forms, among many others. Luckily, you have the option of automating these tasks to help save time that would have otherwise been wasted. Automating business functions will also help lower operating costs, increase production output, reduce the need for outsourcing, optimize floor space, and maximize labor. Automating business functions is costly; therefore, you’ll need to save first for the equipment and process you need.
You should also consider remote work. This is an idea most businesses picked up during the Corona Virus pandemic. Most of these businesses couldn’t carry out normal business operations and couldn’t cater to bills such as rent. Some closed down, and others introduced the option of remote working. If a company decided to do remote work only, they did not incur the expense of rent and other office supplies.
Creating department budgets can also help reduce expenses. Budgeting is important in business. However, you will need to create a budget that’s specific to the different departments within the business. Different departments have different needs. One may need more money to operate efficiently, and another may require a budget cut. It’ll also allow the business to track how each department spends its money.
You should also consider going paperless. How many of your office supplies are in paper form? Do the math. You would be surprised at the thousands of dollars you pay monthly for paper in your business. While some departments in your organization must use paper, other departments can be fully digitized by moving all their functions online.
Another valuable tip is consolidating business events: This basically means holding one big event that addresses multiple needs. For example, you can combine a business anniversary with a promotion party. Combining these different events into one will help to; reduce costs, increase the economies of scale, increase revenue, and attract partnerships.
Consider renting instead of buying. You don’t need to own all equipment; buying equipment is one of the significant expenses that companies incur. Therefore, to cut down on these expenses, choose to rent equipment instead. It’ll help free up money that could otherwise be directed to other functions within the business
Saving requires an intentional approach. Take some time to think about your savings goals for your business and develop a definitive plan. Note down your priorities and make sure to save first for them. You can use this read as your guide.