Keeping track of income and expenses is essential, even if you don't own a business. And if you do own a business, things get even more complicated. There are paychecks to issue, taxes to track, and subcontractors to pay out. All of these details are a whole lot less challenging when you hire an accountant to oversee them. However, it is still important to know a little bit about accounting yourself. Dig into the articles on this website, and you'll gain a better understanding of accounting principles, what services accountants really offer, and the benefits of hiring these professionals to assist with your finances.
Do you want to create a workable budget for your business? Do you need to forecast cash flow? Do you even know if you're really turning a profit? The key to all these important financial challenges is to quantify and manage expenses. Here's a short guide to wrangling your company's expenses by understanding and projecting these three categories of expenses.
1. Fixed Expenses
The easiest category of expenses to forecast is fixed expenses. As their name implies, these expenses are generally the same from period to period. Fixed expenses often include long-term leases, fixed salaries, loan payments, regular fees, retainers, or licenses.
Forecasts and budgets should both start with a list of these fixed costs that happen weekly and monthly. These will be the easiest to add up — and will be the most accurate. Afterward, look back over the prior six 6 to 12 months to capture fixed costs that occur less frequently.
2. Variable Expenses
Variable expenses are all the costs of running your business that change on a regular basis. This category includes things like supplies, raw materials, wages, marketing, and advertising. Many of these expenses do occur at least once in each period, but some may happen only a few times per year or even less often.
Adding up variable expenses is more challenging, but it can work if you look back over that same 6 to 12 month period. This time frame allows you to see patterns rather than individual expenses. To find the right budget for office supplies, for instance, use several months' worth of costs in your books to come up with an average amount per month. This turns into your forecasted figure.
3. One-Time Expenses
Not every expense recurs with any frequency, of course. You will occasionally need to replace a piece of large equipment, buy a new vehicle, take out a new loan, or buy holiday gifts. These one-time costs generally can only be projected by looking at things like the ages of your major equipment, the remaining length of loans and leases, and what major company events are coming up.
It's not always easy to learn how to accurately project your future expenses, but it's an important task. The key is to have accurate records of what has happened in the past. If your business is not yet making use of accounting software to track and categorize expenses, now is the time to do so.
As you get more and more information about past expenses in these categories, you'll have the information needed to set budgets, protect your cash flow, and ensure the company continues to earn a profit for years to come. Get started today by meeting with a business accounting service today.