It’s always important to keep track of your organization’s expenses – after all, they’re the funds used during your daily operations to generate revenue! Expenses can be divided into two major categories: direct and indirect. Direct expenses refer to costs that are directly related to the production of goods or services, whereas indirect expenses refer to those that aren’t as closely tied to the production process. Being mindful of these categories can help you better understand where your organization’s money is going and how to optimize your spending for maximum efficiency.
Direct Expense
Direct expense refers to the company’s cost for its core operations. These expenses are related to the purchase of goods for the company. For example, a freelance writer may buy utensils for their writing purpose, or an executive hires a freight for their organization – these expenses are known as direct expenses.
Direct expenses can be deductible, according to the IRS. However, it must be proven that these expenses generate revenue for the company. Another term for this is a direct cost.
Indirect Expense
Indirect expenses are all other expenses that are required to run an organization. Bills, rent, insurance, office supplies, and legal charges are all considered incidental expenses. Indirect expense is unrelated to the company’s business operations; however, it is as important as direct costs to run an organization.
Indirect expenses can vary for different companies. These expenses appear on the debit side of the IRS, which means they are non-deductible. Personal and indirect costs are not considered IRS deductible.
Tracking Your Expenses
How do I maintain a monthly budget? I cannot save anything by the end of the month; what should I do? I have to pay my tuition; how do I manage? Whether running a household or an organization, these questions run in everyone’s mind.
Many people ask why keeping track of one’s expenses is essential. The answer is simple: if you want to maintain your finances, you must keep track of every penny. Keeping track of your payments will help you maintain a monthly budget and long-term goals.
Most large organizations have an accounts department that performs the bookkeeping for the company. The department keeps track of the money spent on the company’s expenditures, including direct and indirect expenses.
Steps to Track Your Expenses
- Monthly bills: List your monthly bills such as utility, phone, cable, credit/debit card, loans, insurance, salaries, and everything that needs to be taken care of every month. Use a spreadsheet or a notebook to write down these bills.
- Personal funds: Groceries, clothes, gas, entertainment, and all personal items fall into this category. These expenses are as necessary as any other expense. Please keep track of these expenses and write them down. Keep your receipts handy or staple them into your notebook. Cash and credit/debit card payments should both be included. These are all considered indirect expenses.
- Review: When you have everything listed, add up the numbers. Once you see your monthly expenditures, think of strategies that will help you save money. For example, try using ATMs that do not charge any additional fees. Cut down on the extra channels you no longer watch; it will reduce your cable bill’s cost. Getting creative here is relatively easy; you’ll have the extra money in your bank account with little effort.
- Significant expenses: These expenses may not be every month but could appear during the year. These include your home/office repairs, travel expenses, furniture, education, or family vacations. It is essential to scrutinize your bank records and plan if you see any of these expenses coming up. Be prepared, as it will help you plan better for an emergency.
- Plan a strategy: After reviewing your expenses, think of a way to cut off anything extra that you do not require. Plan for your goals. Set up a target every month to save up a certain amount. If possible, open a savings account and put in monthly money.
Conclusion
Tracking your direct and indirect expenses is crucial for small businesses to maintain profitability and financial stability. Direct expenses, such as the cost of goods sold or labor costs, are easy to identify and track. Still, indirect expenses, such as office supplies or marketing expenses, can quickly add up and affect the bottom line. By monitoring and analyzing all expenses, small business owners can make informed decisions about where to cut costs and improve efficiencies, ultimately leading to increased profits and business success. Complete Controller is there to help you along the way. Check out our blog for more helpful articles on your path to success.
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