How to categorise expenses for small businesses + free business expense template

Categorising business expenses doesn’t come easily, but it’s one of the most important activities any small business owner must do—both for tax season and cost management.

The debate on how much a small business should be spending in a month or year will never end. For instance, author and entrepreneur Mike Michalowicz argues that the magic number is 30% of your revenue. However, pretty much everyone will agree that each type of small business expense falls into some kind of category.

In turn, identifying these categories is how you rein in your spending. 

Why do you need to track the source of your business expenses?

Knowing the source of your taxable business expenses is the first step to getting full visibility of your spending. By identifying your expense categories, you can:

• Organise your spending by type
• Track which expenditures are driving up costs
• Pinpoint areas where you can reduce spending, improve efficiency, and save money

The alternative would be playing a game of detective each month as you sort through invoices and figure out what you’re spending on the most. 

This may seem like common sense, but you’d be surprised how often poor visibility of finances leads to disaster. In fact, research by CB Insights shows that running out of cash is the top reason startups fail. Case in point: augmented reality startup Daqri was forced to shut down in 2019 after burning through $250m million in VC funding and failing to raise a new round of investments. 

Identifying your business expense categories is also essential for tax purposes. It lets you know your allowable expenses (i.e., non-taxable) and what claims you can file a claim for.
 

How to identify your business expense categories

Fortunately, identifying the source of your business spending is a matter of getting your managers or C-suite together and using an automated platform or tool. The key is consistency and comprehensiveness—this enables you to identify duplicate costs and redundancies across teams departments.

Business expenditures come in many forms and depend on the nature of your small business. For example, a property management company will have specific categories for repairs, maintenance, and tools, while a marketing agency may have categories for software subscriptions and freelancer fees. 

In other words, choose your expense categories depending on their financial importance to your business. Still, most business expenses will fall into these primary types:

1. Supply chain costs

Supply chain costs are costs associated with the production and delivery of a product or service. Manufacturing companies typically define supply chain costs by calculating the total cost of ownership — the aggregate cost of procuring products, including any and all costs incurred throughout the supply chain journey. According to some estimates, supply chain costs can range between 10% to 20% of a company’s revenues. 

2. Transportation costs

Transportation (not to be confused with travel costs) or shipping costs are perhaps the biggest cost driver of logistics. These costs include all expenses incurred when transporting raw materials, products and employees—essentially all the money spent on the moving parts that ensure your customers get your product or service on time.

The pandemic has caused transportation costs to skyrocket by 300%, with the increased eCommerce activity causing shipping container shortages. In Singapore, companies like Ikea report that thousands of its products have been affected by these shortages. 

3. Employee salaries and benefits

Payroll and benefits are arguably the biggest expense of any small business, accounting for up to 68% of your revenue. It’s not just each member of your staff represents thousands (if not hundreds of thousands) of dollars per year but also that they come with other expenses such as taxes and benefits (e.g., healthcare, pensions, and other extras).

It’s also important to note that salaries are not a fixed expense—you also have to account for pay increases. As much as 87% of companies in Asia Pacific, for example, are planning to increase salaries in 2021—showing optimism despite the pandemic. 

4. Business travel 

Business travel expenses are the costs incurred when employees travel for business purposes. They can include the costs of products and services incurred before, during, and even after the trip, such as travel insurance, airline tickets, meals, lodging, and transportation. Amid the pandemic, companies also have to pay for quarantine costs and COVID-19 testing. 

5. Rent

Rent expenses include the cost of renting an office, retail space, factory or warehouse. Rent expense is a fixed component of your operating expenses, albeit one that can fluctuate depending on the terms of your lease.  

In Singapore, the first quarter of 2021 saw the median office rent hover between $2.51 and $7.95 per square foot each month. That means an office space with 2,000 square feet can cost anywhere between $5,000 to $15,900 per month.

6. IT expenses

IT expenses include internal and external personnel costs, owned and leased hardware costs, software as a subscription (SaaS) fees, and data and voice network costs (including subscription fees and network equipment). 

IT is one of the fastest-growing business expense categories, with Gartner predicting global IT spending to increase by 8.6% or $3.8 trillion in 2020 to $4.2 trillion in 2021. This is largely due to the acceleration of digital transformation in businesses, which, in turn, is caused by pandemic-driven trends (e.g., remote working) and the growing accessibility of SaaS products. 

7. Utilities

These expenses include bills like electricity, water, gas and trash collection. It can also include the cost of your telephony network and broadband/fibre connection—although these often fall under your tech stack/IT expenses. 

8. Licenses and insurance

Business licenses and insurance are usually mandatory costs associated with running the business legally and are paid on an annual basis. Business licenses or permits can be thought of as a tax or levy, while business insurance protects your business against losses suffered in the course of normal operations.

9. Employee training 

Employee training expenses include the cost of employee certifications, paid webinars, and e-learning programmes among others. 

This expense category is often associated with large companies like GE and McDonald’s, which have continuing education programmes in place for employees. But startups and small businesses are beginning to see the value of learning programmes, both in terms of scaling the company and attracting new talent. 

For instance, a 2019 LinkedIn survey found that 40% of employees in Singapore have left an employer because of a lack of learning and development opportunities.

10. Marketing

Every small business must have a budget for advertising and marketing, which have a direct correlation with growth. Marketing is essential to attracting more customers and keeps existing ones engaged.  

Typical marketing expenses include contractor fees for freelancers and digital marketing agencies, digital ads on social media and search engines, newspaper and magazine ads, TV and radio ads, billboards, and trade show costs. 
 

Template

To learn about how you can start planning your business expenses today, try out our free business expense template! 

Spend wisely!

Expense categorisation rarely comes naturally to many small businesses. We hope this guide is helpful! 

To track your expenses efficiently and find out how to drive down costs, you need to develop a comprehensive system for categorising your expenses at the granular level. This is where an expense management tech stack comes in, allowing you to develop spend management workflows and monitor expenses in real-time. 

If you’re looking for additional help in managing your business expenses, get in touch with SAP Concur today.