Finance Management

What are expenses, types and how to control them efficiently

admin • 17 Sep 2023

Expenses are part of the routine of any company . These payments are essential for maintaining the business. After all, without them, the company would not be able to hire people, buy raw materials or take care of its administration.

However, you have to be very careful. This is because paying expenses means taking money out of the cash register. This can be very dangerous for the financial health of the business if it is not done with planning and awareness of the current situation.
In this article, you will understand what expenses are , what the difference is between expenses and costs and check out our tips for controlling them.

Now, let's move on to the text. Follow below!

What Are Expenses?

Expenses are resources applied to the management structure of a company, with the aim of supporting its operation as a whole . In short, we can say that they are related to business administration.

This is because these resources are applied to the commercial, marketing , product development and financial areas. In other words, they are not directly related to production – these are costs, which we will talk about later.

What Are The Types Of Expense?

Expenses are classified into five types and knowing them is essential so that you know how to classify them and, therefore, manage them better .

Fixed expenses

Fixed expenses correspond to fixed monthly expenses, as the name suggests. They are constant and, in many cases, predictable, as they are not linked to fluctuations in production volume.

Variable Expenses

The variables are those that are related to the volume of production and, therefore, the values ​​fluctuate from one period to another.

Examples of variable expenses are commissions paid to employees, taxes calculated based on the company's revenue , expenses with transport and distribution of products, bonuses offered to employees, among others.

Operational expenses

Operating costs are those expenses that are essential to keep the company running. They can be administrative, commercial or specific:

• Administrative: relate to salaries and benefits, taxes and insurance;
• Commercial: those aimed at publicizing the business, such as press relations, advertising and gifts;
• Specific: they are unique to each company and vary according to the internal policies of each organization.

Non-Operating Expenses

The non-operational ones are those that are not directly linked to the functioning or carrying out of the main activity of the company. Some examples are the payment of interest and dividends.

Pre-Operating Expenses

Pre-operational activities are essential for the company to be able to carry out its activities and expand its processes. They are paid before production begins and are inevitable for the implementation of the business.

How Important Is It to Classify Expenses Correctly?

Classifying expenses correctly is the first step for the manager to gain an in-depth understanding of the company's financial profile. This way, it is possible to manage them more effectively, understanding where each part of the resources disbursed goes.

This makes it easier to control expenses and measure the financial health of the business, which allows for more conscious decision-making. With this knowledge, it is possible, for example, to understand whether it is time to cut expenses or invest in business expansion.

But if the decision is to cut expenses, knowing the expenses is essential to know which ones can be cut so that the business is not harmed.

What is the difference between costs, expenses and expenses?

The terms “costs”, “expenses” and “ expenses” are used in the financial context of companies, and each one has a specific meaning.

Costs refer to the expenses associated with the production of goods or services in a company. They include raw materials, direct labor, energy, rental of facilities and other resources necessary to manufacture the products.

Expenses, on the other hand, are the expenses incurred to acquire assets or investments that will benefit the company in the long run. Examples of expenses include the purchase of equipment, machinery, vehicles and real estate for the company.

Expenses are those expenses necessary for the daily operation of the company, but which are not directly related to production. This may include administrative salaries, office rent, utility bills, marketing expenses and corporate travel.

Cost Examples

Costs, as we said, are linked to the production of a company, that is, to the financing of the materials and processes necessary for the execution of its core activity.

These are some examples of costs:

• purchase of raw materials;
• hiring of labor;
• purchase of packaging;
• electricity;
• Machine maintenance;
• depreciation of machinery and equipment;
• cleaning and conservation materials for the factory plant.

Examples of Expenses

Expenses are related to all other activities carried out by the company , with the exception of its core activity, which is production. As examples of expenses we can mention:

• renting the space where the company operates;
• hiring employees who work in other sectors, such as human resources and finance;
• sales costs ;
• office supplies ;
• consumption bills , such as internet, for example;
• expenses on benefits offered to employees, such as snacks, for example.

Spending Examples

Example of business expenses: Purchase of new machinery, investment in cutting-edge technology, acquisition of stock, payment for consultancy services, hiring an advertising agency.

What influence do costs and expenses have on the budget?

Knowing the company's costs and expenses well is very important for adequate budget planning.

All these expenses need to be predicted so that the correct division of values ​​can be made for each sector. Furthermore, it includes the definition of priorities, if it is not possible to cover all needs.

All this work is only possible when the manager knows all the costs and expenses of the business, in addition to the amount needed for each sector.

Some companies do not correctly classify their expenses or divide their resources. Therefore, they run the risk of not having enough cash to properly operate each sector.

Therefore, it will be necessary to rearrange values ​​after the problem is already established, or, worse, need to deal with the lack of resources for proper operation.

Tips for Optimal Control of Expenses

Now that you know what expenses are and how important it is to know and classify them, check out some tips for better control in your company!

Have a Financial Plan

Planning is the first step towards more efficient management . It must aggregate all information about the company's finances and serve as a guide for managers, indicating objectives, goals and actions necessary to achieve them.

Build a Control Flow

This flow doesn't need to be very complex to work. The important thing is to designate a person to carry out the control and define a frequency to analyze the results.

Define Indicators

For the analysis to be successful, it is important to define which indicators will be monitored.

And don't forget to document the results for each analysis. This way it is possible to understand which sectors are bringing the best results and which ones need improvements.

Control Stock

Poorly managed inventory can cause financial losses – after all, idle product is idle money. Therefore, invest in training the team responsible for this management!

Don't Miss Payment Deadlines

Late payments are, without a doubt, one of the main sources of unnecessary expenses. Be sure to pay attention to these deadlines and, if you are unable to pay, negotiate with your suppliers to avoid fines.

Count on Technology

Having management software will help you automate many of these control activities. Furthermore, it will reduce the chances of errors and provide ready-made reports on the company's expenses . This makes the entire analysis process more efficient!

How to Identify Possible Unnecessary Expenses?

One of the best practices for efficiently managing business expenses is knowing when to cut expenses — and which ones can be cut.

The first step to this is to make a list of all the company's expenses , no matter how small they may be. Only in this way is it possible to have an overview of all of them and, from there, start prioritizing.

The next step, therefore, is to classify these expenses as essential, important or superfluous.

Initially, you must cut superfluous expenses , which are those that, in the end, do not directly impact the financial result of the business.

In more serious situations, it may be necessary to cut other expenses , which may have more impact on results.

Prioritize the most important expenses and cut those that you think have the least influence on sales results at the end of the month.

How to Analyze a Company’s Costs and Expenses?

Analyzing a company's costs and expenses is essential to understanding its financial health. Here are some steps to perform this analysis:

1. Collect data: Gather detailed information about the company's costs and expenses , including accounting records, receipts, invoices and financial reports.
2. Classify costs and expenses : Organize expenses into relevant categories such as raw materials, labor, rent, marketing, energy, and more. This will make it easier to understand and analyze the numbers.
3. Calculate percentages: Determine the percentage of each category in relation to total costs and expenses . This will help identify areas that consume the most financial resources.
4. Compare to previous periods: Analyze current costs and expenses compared to previous periods, such as previous quarters or years. This will reveal significant trends and variations.
5. Benchmarking: Compare the company's costs and expenses with similar companies in the same sector. This will allow you to assess whether spending is within acceptable standards and identify possible areas for improvement.
6. Identify variations: Analyze which costs and expenses are above or below expectations and investigate the reasons behind these variations. This may involve identifying inefficiencies, cutting waste or adjusting strategies.
7. Assess profitability: Consider how costs and expenses affect the company's profitability. Identify the products, services or areas of business that generate the most profit and those that are struggling financially.
8. Take corrective measures: Based on the analysis performed, take measures to reduce costs, optimize expenses and improve operational efficiency. This may include renegotiating contracts, seeking more competitive suppliers or implementing expense control programs.

Regularly analyzing costs and expenses will allow the company to make more informed financial decisions, identify savings opportunities and maintain solid financial health.