As a business owner, keeping track of your company’s expenses can feel like a constant challenge. One month, you might find yourself spending more on packing and shipping; the next, your payroll expenses could spike. These fluctuations can make it difficult to truly understand where your money is going and why it happens. But don’t worry—there are ways to get a handle on your spending. By categorizing your expenses into three main groups, you can gain a clearer picture of your finances and make more informed decisions.
Step 1: Identify Your Fixed Expenses
Fixed expenses are the predictable costs that stay the same, regardless of your business activity. These are the bills that you can count on every month. Salaries for salaried employees, for example, are fixed expenses—you pay the same amount consistently with each payroll cycle. Other fixed costs include things like insurance premiums and office rent, which don’t change unless there’s a major change in your business structure or location.
To get started, take a close look at your financial records and identify all of the expenses that remain consistent over time. If any costs have fluctuated slightly in the past, you can consider them variable expenses instead.
Step 2: Consider Your Variable Expenses
Variable expenses are those that fluctuate depending on your business’s activity level. These are the costs that change month to month, often directly tied to how much you’re producing, selling, or operating. For example, procurement costs may be higher during certain months, like after the holiday season when you restock for the new year.
Shipping and packaging costs are another key variable expense. The more products you sell, the higher your logistics costs will be. Utilities like electricity and water also tend to vary, depending on usage, but you should still track average costs to help predict and manage these expenses more effectively.
Step 3: Account for Periodic Payments
Periodic expenses are the ones that occur occasionally but are often unexpected or irregular. These payments don’t follow a set schedule, making them harder to predict. Examples of periodic expenses include emergency costs, such as legal fees from a lawsuit, or unforeseen repairs to equipment or property.
While you may not encounter these expenses often, it’s important to be prepared for them. A good rule of thumb is to set aside some savings for periodic expenses. Ideally, try to keep a reserve fund equal to at least 12 months of operating profits, so you’re not caught off guard if these costs arise unexpectedly.
Conclusion
Understanding and categorizing your expenses is a crucial part of managing your business finances. By recognizing the differences between fixed, variable, and periodic expenses, you can gain greater control over your cash flow and avoid financial stress. Always keep an eye on your spending, and take steps to plan for both expected and unexpected costs. By staying organized and prepared, you can ensure that your business remains financially healthy and well-positioned for success.