How do you identify necessary business expenses?

From my personal experience, managing business expenses is all about finding the right balance between spending and saving. It is crucial to identify the necessary expenses. When I started my own business, I aimed to keep the costs low. However, I recognised the need for a professional website in my consulting field, and it was a necessary expense. On the other hand, I had to consider purchasing a company car for client visits, which was a significant expense. Unlike the website, it was not crucial, and I used my personal car as an alternative. This scenario taught me the importance of evaluating each expense based on its real value to the business and the unique needs of the business.

There should not be unnecessary expenses for a business. This is key. All expenses a business incurred must be justifiable and in line with the overall business objectives of the Company. Expenses are also very important to be categorised in different manners and for different reasons. It may have even tax consequences if not properly categorised. For e.g. tax allowable expenses. Expenses can also be used as a measure of performance. Overall, every business should be able to determine, in line with its budget and business goal, what are the expenses which paid off! After all a business a here to increase the shareholders' wealth.

Necessary business expenses are the ones which are directly attributable to the business and are necessarily required to be incurred to keep the business running. Every business has its typical needs so an expense may be necessary in an industry but the same may not be true in another industry.

from my experience so far, effective expense management involves finding a balance between minimizing unnecessary costs and investing in areas that contribute to your business's growth and success.

Em suma, são as despesas que são ligadas à operação de negociação e entrega do produto e que variam de acordo com o volume de vendas: fretes, verbas de propaganda cooperada (vpc), outras despesas variáveis de vendas. Estas despesas (não custos) são necessárias para que o faturamento seja viabilizado.

It is important to separate your expenses between those that are PRODUCT/SERVICE oriented vs PERIODIC expenses. Product expenses are directly attributed to what you sell and are clear such as Labour, materials, Overhead etc. Period expenses are those that support the product expenses such as SGA (Selling, General and Administration). This allows managers to understand costs that are controllable vs uncontrollable and also discretionary vs necessary expenses.

Not every expense has measurable return. However the current systems allow companies to look more closer to ROI when some higher expenses are in question. Different ratios eg 1:50 or even higher are in place when it is a funded marketing activity that should be backed up with real demand/lead generation. Approach to expense management differs from one company to an other and it is an important part of the cost management.

The recording of expenses, and revenues, should not be by adherence to a text book or manual, but we would encourage clients to start by asking - what information on your business, say through KPI's, do you want to extract from your recording system. Once you have clearly identified what knowledge you need from the systems to manage and control your business, now you can decide how to categorize your revenues and costs. The worst mistake you can make is to have a recording system that's too bland, and then have to spend hours afterwards reanalysing revenue and cost to get meaningful knowledge. The adage to remember is "garbage in, garbage out". Plan for the output, then arrange the inputs to suit

This involves breaking down your expenses into different groups, to give you a clear view of your finances and help in decision making. Some of the groups include operational expenses like rent, utilities, office supplies; personnel costs like salaries; or even marketing and advertising expenses like insurance and taxes. The groupings will depend on your business expenses

Categorizing business expenses: Fixed Costs: Regular expenses like rent, salaries, and insurance. Variable Costs: Fluctuating costs such as raw materials and utilities. Operational Expenses: Daily costs like office supplies and travel. Capital Expenditures: Long-term investments like machinery or property. SG&A: Overhead costs like marketing and administrative salaries. Taxes and Licenses: Payments for business permits and income taxes. Debt Service: Interest and principal repayments on loans. Professional Fees: Costs for external services like accountants. Employee Benefits: Health insurance, retirement contributions. Miscellaneous: Infrequent or unexpected costs. Regular reviews ensure accurate financial records.

In my experience, business expenses need to be categorized carefully as one of my client's expenses for dog food, as her logic is that the dog is attending the office. In the same way, the entertainment of prospective clients is not a taxable expense. The accountant or bookkeeper should be aware of the tax rules.

Recording business expenses: Receipts: Always keep and organize receipts for every expense. Accounting Software: Use tools like QuickBooks or Xero to input and track expenses. Expense Categories: Categorize expenses (e.g., rent, utilities, travel) for clarity. Bank Statements: Regularly reconcile expenses with bank and credit card statements. Digital Tools: Use apps to scan and digitize receipts, automating expense entry. Journals: Manually log expenses in a ledger or journal if not using software. Review: Periodically review entries for accuracy and completeness. Professional Help: Consider hiring an accountant or bookkeeper for accuracy. Consistent recording ensures accurate financial reporting and tax compliance.

Having added to the previous section the analysis of costs and by definition therefore, also the recording of them, let's think through accounting systems. Firstly ensure that your software is "cloud based" but in selecting your software, consider also where that information is stored. For perfectly legitimate business reasons, you may want to avoid your data being accessed by the USA, well remember that the EU has transparency with the US, so avoid software where the hub is EU based. Use a software package that has a tried, tested and familiar user experience, it will make employing and training staff so much easier if there is familiarity. A final thought, let your accountant administer the software for you; they have the experience

Compiling a Manual of Accounting for a Software developer. Many items of expenditure were incurred on each project and many were wrongly allocated. We discussed the matter with the relevant project supervisors/incharge. We agreed: Open a Mega Account in the ledger. Record all items of expense, small or big, direct or indirect except payroll. Real time recording 2. Appoint Expense Accountant. Allocate each item of expense in Mega Account to the right cost center. Balance of the All Expense Account = unallocated expense. The management makes sure Mega Account is minimum and fully allocated. 3. Part of expense allocated to the job will be given an explanation of basis. 4. Statement of expenses for the month will be given job-wise.

In the profit and loss statement, expenses are categorized as costs and therefore they reduce total revenue. They are deducted to calculate net profit or net loss

Reporting business expenses: Categorize: Group expenses into relevant categories (e.g., rent, travel, supplies). Use Software: Tools like QuickBooks generate detailed expense reports. Document: Attach receipts or invoices to validate each expense. Time Frame: Report expenses based on specific periods (monthly, quarterly, annually). Highlight Significant Items: Point out unusual or large expenses for clarity. Total Amounts: Sum expenses in each category for an overall view. Compare: Relate current expenses to past periods or budgets to identify trends. Submit: For larger organizations, forward reports to finance departments or managers. Regular reporting aids in budgeting, financial analysis, and tax preparation.

The most important element is ... what do you want from the accounting information. Yes, there will need to be formal accounts and tax returns, but the primary user of the accounts is you, the owner; let the accountants worry about the external reporting. You the owner are the most important person; let's make the important person the first consideration. Once you've designed your reporting to give you the knowledge that will let you quickly and efficiently identify threats and opportunities, then let your accountant input to what small incremental changes they want to keep the costs of compliance reduced. Monthly management accounts, produced quickly that are accurate and deliver essential insight into the KPI's of your business is key

I agree with the submission above. The tax laws in different jurisdictions specifies expenses that are allowed as deductible. For example, in Nigeria, only expenses that are wholly, reasonable, exclusive and necessary (generally referred to as WREN) for the purpose of generating the profit of the business are allowable for deduction in arriving at the taxable profit of the business. The tax laws also provides guidance on what meets the WREN rule and those that falls outside it. It is also important to separate personal and business expenses. This is a major area of interest of the tax authorities as many businesses especially the startups and SMEs struggle to keep proper accounting records and separate personal from business expenses.

Deducting business expenses: Verify Eligibility: Ensure expenses are both ordinary (common in your industry) and necessary. Keep Records: Maintain organized receipts, invoices, and bank statements. Categorize: Group expenses (e.g., rent, supplies, travel). Use Form: In the U.S., typically use IRS Schedule C for sole proprietors to report and deduct expenses. Home Office: Deduct a portion of home expenses if a space is exclusively for business. Vehicle Use: Deduct mileage or actual expenses if used for business. Depreciation: Deduct the cost of assets over time. Limitations: Be aware of limits (e.g., meals at 50%). Review Laws: Tax laws change; stay updated or consult a tax professional.

The essential message of tax deduction is to engage with the tax specialists - we're a UK based firm, so that's where the bulk of our experience lies, but we also have the dedicated team/company that focuses on the overseas markets (Expat Tax Advice). The rules on tax deduction / allowability is not always a clearly defined line. Take advice, including when you stand back from the "line in the sand" and when your toes can touch the line.

In my experience, certain business expenses are unavoidable, while others can be avoided. Unavoidable business expenses includes expenses to obtain the necessary license or permits, registration with the tax authorities and relevant regulatory body supervising the industry where the business operates, getting the required training, software , website, tools and assets, branding and marketing costs etc. Expensive office space can be avoided at commencement of business. The business may consider a private co-working space or an home office if in the service industry. For manufacturing businesses, starting under a contract manufacturing arrangement may be a good way to startup and reduce business expenses.

Making sure to use history to predict the future is key with expenses. Making sure to have a good track record of data on these expenses will help forecast for the years ahead. Someone that has a grasp on the historical expenses ,projection of expenses and understanding of their companies new expenses are very valuable to any org.

The organization must build a culture of understanding what truly serves the business purpose. Then recognize people who truly serve the purpose. For example, if the organization is in a cost-cutting mode, some travelling employees might voluntarily choose economy seats even if they have the option to travel on business class. Silent recognition of such individuals is very effective than treating them as among those who need to be pressured into policy compliance.