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4 Different Types of Business Expenses: Definition, Difference, and Example.

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8 septembre 2022
Temps de lecture : 5 min
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In running a business, different factors need to be considered by the company. One of these factors is expenses, which are the costs or amount of funds that a company spends to run the business and keep the company afloat. Business expenses are inevitable, recurring, and need to be addressed; otherwise, there is a risk that the firm will not have enough resources to run the enterprise. Furthermore, these costs will determine whether the company will gain or lose money. In a cash flow statement, they are called outflows, as it is the money that is going out of the business. With that being said, the expenses must be lower than the profit to obtain funds. If the expenses are higher, it means that the company is losing money, which may lead to bankruptcy in the long run. With that being said, there are different types of expenses that the company must be aware of. They have been categorized into four different classifications for easier tracking.

What are the different types of expenses?

Expenses are the costs or values that a company needs to pay to run its business. A business does not always mean that it is gaining money all the time. To generate money, they must be able to spend money on the essential things that the firm needs to keep running. A company will encounter different types of expenses when running its business. These expenses are essential in making or breaking the business.

Listed below are the different types of expenses.

- Operating Business Expenses: These are the costs that are associated with the daily core functions of the company.

- Non-Operating Business Expenses: These are the costs that are not related to the day-to-day tasks of the firm.

- Fixed Business Expense: The value of the payment is permanent and recurring.

- Variable Business Expense: The value of the payment can fluctuate or change over time.

1. Operating Business Expense

Operating Business Expense, sometimes called OpEx, is the amount of money spent on a company’s daily functions, thus the term “operating.” It is essential and inevitable to run a business and compete with other companies. Production and manufacturing of goods and services are not considered operating expenses. It includes rent for property, utilities such as water and electricity, salaries of the employees, supplies and materials, taxes, and depreciation. These expenses are deducted from the sales revenue to generate the business’ operating income. A cash flow statement will be presented on the operational activities of a firm.

2. Non-operating Business Expense

Non-operating business expenses, sometimes referred to as non-OpEx, are the opposite of operating business expenses. The funds are being spent in the areas of the company that are not related to the main operations of the business. Typically, it will not occur like operating expenses, as it will depend on the situation the company is experiencing. It includes interest payments if the company applied for a loan, investments if the stock was lost, and settlements when they experienced a lawsuit. Additionally, when the company sells its brand internationally, it might experience currency fluctuations. Moreover, disasters are unforeseen events that can cause additional expenses for the firm.

3. Fixed Business Expense

Fixed business expenses are the types that do not change in value, hence the name “fixed.” It must be paid by the company either monthly or annually. The values can fluctuate at times, but they do not change when the production volume of the business changes. It means no matter how many goods or services are manufactured or created, the cost of the expense will always be the same. The only factor that can change its value is the range of time. Rent, insurance, salaries, loans, and property taxes are a few examples of fixed expenses. All the prices for these will vary depending on how they are going to be used, just like the property rent.

4. Variable Expense

Variable Expense is the opposite of the Fixes Business Expense, as its value depends on the volume of production. It varies depending on certain factors like materials, credit card fees, and commissions. When producing a product, raw materials and supplies are needed, and the amount of the supplies and materials will depend on how many are going to be produced. It goes the same for commissions, which are the fees that are paid to a person for providing a service.

What are some business expense examples?

Business expenses, also known as deductions, are the most common payments that a company encounters daily. According to the Business Expenses Definitions, even though paying expenses means that the company is releasing money, it is essential to keep the business running. There are different kinds of expenses that a company may encounter. These are marketing, legal, salaries, equipment rentals, utilities, supplies, insurance, and maintenance and repair costs. Additionally, there are two kinds of expenses, namely deductible and nondeductible.

What types of business expenses are tax-deductible?

There are two different types of expenses, and the first one is called tax-deductible. Tax-deductible expense is the usual, vital, and rational aspect of the company that is needed by the business to produce funds. They are subtracted from the revenue before taxation, thus lowering the tax liabilities; the person will have fewer taxes owed once all of those expenses are deducted. Travel, interest, insurance, marketing, supplies, utilities, and salaries are tax-deductible business expenses.

Is depreciation tax-deductible?

Yes, depreciation is a tax-deductible expense, which is the value of an asset that has diminished in value. It will be subtracted from a person’s taxable income before they completely pay the taxes. It is being written off as an expense on the tax return, meaning that the company will cover the cost that was spent on the property and resources.

What types of business expenses are not tax-deductible?

As mentioned, there are two types of business expenses. The second one is known as a non-taxable expense. It is the costs encountered by the company that are not being subtracted before paying the taxes according to the government. The company is not responsible for covering these expenses. It includes personal expenses like penalties, transportation, clothes, and legal fees.

How do business expenses affect cash flow?

Cash flow keeps track of all the records of cash movement in the company. It includes all the funds that come in and out of the business. According to cash flow analysis, expenses are one of the outflows of a firm. The company is losing money if the amount of money being used to pay for things is higher than the revenue, thus resulting in a negative cash flow.

Is depreciation a business expense?

Yes, depreciation is a business expense, specifically a tax-deductible expense. It is considered a normal business expense. But what is depreciation? It is the term used to describe the process in which a physical property or resource decreases in monetary value. It diminishes its worth over time because of prolonged use.

What type of business expense does depreciation fall into?

Depreciation is a non-cash operating expense. As mentioned above, depreciation deals with the assets of the company. These valuable properties and resources are typically used by the firm in its daily functions. Thus, it is considered an operating expense as it is associated with the main tasks of the company.

What is the difference between big corporations and small businesses when it comes to business expenses?

Big corporations spend more on expenses than small businesses. Most of the time, they earn more income than the small ones, and the higher the income, the higher their taxes and expenses will be. A bigger company has a larger property where their business operates, thus higher property taxes as well. In addition to that, big companies have a large population in terms of employees. It means that the salaries and wage expenses will increase as well. The company will have to pay more employees than small business owners. Furthermore, bigger firms may need more supplies than smaller firms to accommodate their large businesses. It means that the bigger companies will have more inventory and supply business expenses.