Business Expenses – Explained in 4 Simple Steps

By: Audry Lewis, Administrative Assistant

Have you ever thought of how you could lower your variable expenses or what accrued expenses are? I am sure these are questions many of us have wondered about before. But, first let us find out what each of these expenses are defined as so that we can get a better understanding. 

Variable Expenses: These are expenses, that fluctuate with company performance and production, like packaging and raw materials. A company’s variable expense increase and decrease with its production volume. When production volume goes up, the variable costs will increase. If the volume goes down, so will the variable expenses. By lowering your variable expenses, this can be one of the most common and effective ways to increase your profit margin.  

Fixed Expenses: These are consistent expenses that you must pay for that will not vary by how much of your product or service you produce. Theoretically your fixed expenses are the price of staying in business. The most common examples of fixed costs include rent, salaries, utilities, insurance, and interest payments. So, the more fixed costs a company has the more revenue they will need to bring in to break even. This means the company will need to produce more and sell more of its products. These costs occur frequently and rarely change so there is not much you can do to cut back on these expenses.  

Accrued Expenses: Are single expenses that have been recorded or reported but not yet paid. In place of this documentation is a journal entry this is created to record an accrued expense, as well as an offsetting liability. An example would be when a company purchases supplies from a vendor but has not yet received an invoice for the purchase. Accrued expenses also include interest payments on loans, warranties on products or services received, and wages incurred for which payment to employees has not yet been made.  

Operating Expenses: These are expenses that are necessary for a company to do business and generate revenue. These expenses are the ongoing expenses incurred from a typical day to day running of a business. Such as rent, payroll, travel expenses, sales, and marketing costs.  Operating expenses can also include the cost of products that are sold such as material costs, repair costs of equipment, direct labor. For example, you could cut back on your operating costs but by cutting too much of the costs back, you can risk reducing a company’s productivity and this will result in also losing profit.  

Holbrook & Manter’s Business Services & Solutions Team can assist you in understanding and tracking all of the expenses for your business. Reach out to us today to get started.