Business managers grow their business by improving the quality of their products and services which leads to increased sales.  When sales increase, expenses increase as well due to increased operational costs.  Expenses are managed in an accounting context which help define the areas of business operations which require cash.  Increased sales lead to higher revenue but can lower profit margins if expenses increase at a higher rate than revenue.  Therefore, business managers need to identify major business expenses and manage these expenses in an effective method as their business grows.

FIVE CATEGORIES OF BUSINESS EXPENSES

The types of expenses a business incurs will be defined by the industry it is in.  For example service oriented businesses will have a different breakup of expenses vs. manufacturing businesses.  But overall five major buckets of expenses that most businesses incur are:  1) Cost of goods sold (COGS), 2) Administrative expenses, 3) Selling expenses, 4) Extraordinary expenses, and 5) Financial expenses.

Cost of Goods Sold (COGS)
Cost of goods sold can include a wide array of expenses. If you sell a product or deliver a service, you will have to incur some costs directly related to delivering the product or service.  An accounting term used to identify these costs is cost of goods sold (COGS).  COGS includes direct raw materials costs used to produce products, direct labor costs for services rendered or for manufacturing products, indirect labor costs and non-cash items like depreciation expense on machinery. The exact sub expenses that make up COGS may differ between businesses and could include direct/indirect service delivery expense, production expense, transportation expense, etc.

Cost of goods sold however is not the only expense a business incurs. Businesses need to sell their products once produced and businesses also have many internal teams supporting and overseeing production related departments.  These additional operating expenses can be broken down into selling expenses and administrative expenses.

Selling Expenses
Suppose you rent a store or shop to sell your products and possibly hire someone to work as an assistant. You will have to add the cost to actually sell your products once produced.  These selling expenses can include rental expense, maintenance expenses, sales assistant’s salary/commissions, advertising costs and cost of promotional materials.  Selling expenses are incurred when you spend money directly and/or indirectly to sell your products or services.

Administrative Expenses
Another major expense is administrative expenses. Administrative expenses many not be easily allocatable to each product produced but is required to maintain the business as a whole.  In includes expenses such as top management and support department salaries, research and development (R&D) expenses, IT support expenses, general utility expenses, stationary expenses and depreciation costs for fixed assets such as facilities that are used to house support staff.

Financial Expenses
Part of managing a business is creating budgets and expense forecasts and managing cash to meet these needs.  Cash can be generated through equity offerings or debt.  Debt requires fixed interest payments and can cause businesses to go bankrupt if not serviced on time.  Fees on borrowed money and costs to raise funds are part of financial expenses that a business occurs.

Extraordinary/One Time Expenses
Markets change and businesses need to change with them.  Often to meet these changes businesses will undergo significant extraordinary or one time expenses such as restructuring, purchasing/selling of business units or major assets, etc.  These major one time expenses incurred by a business are referred to as extraordinary expenses.

Successful business managers keep track of all expenses and forecast expenses regularly to manage their bottom line.  Thinking in the above mentioned buckets can help managers with expense management and forecasting.

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