As part of OnlineAdvisor’s efforts to educate, inform and encourage business leaders, we present key financial terms and concepts. An integral part of financial literacy for a business is expense management. How you manage expenses is often overlooked, but it is important to your organization.
Expenses are a critical area on the income statement to be monitored. How you manage your expenses will have an effect on your company’s profitability. Although this may seem obvious, this is an area that is overlooked in way too many small companies.
By categorizing your expenses, it allows you to monitor current costs of doing business and to budget for the future. By realizing how much you are spending in particular areas, you can keep your necessary costs to a minimum. Many businesses waste money because they don't monitor their expenses.
Expense areas such as travel and entertainment, utilities, and office supplies create unnecessary expenses. There is a lot of waste in the corporate world in these areas. Office supplies is arguably the worst area for wasteful spending.
An Example of Wasteful Expenses
One company was able to reduce their office supplies expense amounts quite a bit. The cause of the excessive expenses: hundreds of dollars were spent on ballpoint pens a year. At first, it didn't make sense. After some investigation, it became clear what was happening.
Every day, salespeople went into the supply closet and grabbed a pen for work. They either left the pen unattended, carried the pen to their car or took all the way home. The pens never returned to the store. As a result, salespeople acquired a large amount of pens and continued to get more from the closet. It was an inside joke that none of the salespeople needed a pen at home. It was obvious that the company became a pen supplier without knowing it.
The solution: the company created a “pen policy.” The policy is simple: as a new employee, you get a pen. When the pen runs out of ink, you get a new pen. Show the manager the dried-out pen, and the manager will get one from the now-locked supply cabinet. Everyone keeps a hold of their pens now. As a result, the company cut office supplies expenses by 20% as a result of the new policy.
Additionally, you want to properly categorize your expenses for tax purposes. Many legal deductions are available for businesses. For example, there is a “Section 179 Deduction”, which is a popular and beneficial tax deduction. It allows certain capital expenditures to be tax-deductible. In simple language, spending money on a big piece of equipment can save you a lot of money on taxes. Claiming these expenses also decreases the taxable income your business reports on its tax return.
Of course, it is important to talk to your tax advisor or accountant to get the most accurate information and advice. Be aware that knowing the law and taking advantage of legal opportunities is a good thing. The IRS encourages those who understand and follow the tax laws get the most legal benefits.
Pay attention to your expenses, manage them well and report them correctly. Careful monitoring of your expenses may be your best benefit possible for you and your business.