There’s a lot to think about when starting a business, and expenses are one of them. The costs you incur now can help you determine if you need to secure funding, at what point you’ll break even, and where you can realize savings.
While the average cost of starting a business can run into tens of thousands of dollars, many small and microbusinesses – particularly home-based companies – can get started for much less.
Here is a list of 25+ small business expenses (grouped by category), plus tips for tracking, managing, and reducing your costs.
Fixed business expenses
Fixed business expenses are precisely that; they remain the same from month to month. These include the overhead of running a business, such as commercial lease payments, mortgage, property taxes, self-employment tax, salaries, loan payments, and business insurance.
Calculating your average fixed expenses can help you understand how much it costs to operate your business and areas where you can save.
Fixed expenses may be tax deductible. For example, you can generally deduct employee pay, insurance, taxes, interest payments, and rent expenses. In addition, if you have a home office that is used regularly and exclusively for business purposes (the dining room table doesn’t count), you can also deduct the fixed expenses associated by claiming the home office deduction. Be sure to consult IRS guidance on Deducting Business Expenses or speak to a business tax advisor.
Variable business expenses
Every business has expenses that vary from month to month or activity to activity. Variable costs include marketing and advertising, inventory, labor, sales commissions, business mileage, meals and entertainment, gifts, raw materials, maintenance costs, utilities, seasonal hiring, and utilities.
If you operate a restaurant, retail business, or niche business, your variable expenses may typically run higher.
Overlooked business expenses
Always look for tax deductions. You might be surprised at which business expenses the IRS allows business owners to write off.
Often overlooked expenses include fixed costs like health insurance premiums. If you pay for healthcare insurance entirely out of your pocket using after-tax dollars (no government subsidies or employer share) you should plan for these and may be able to claim a tax deduction.
Other costs that often fly under the radar and are tax deductible include mileage incurred driving to meetings or even to the store to buy office supplies (check the IRS website for the latest standard mileage rate, which changes each year).
Variable startup costs like business incorporation fees and the services of a registered agent also play into your budget and are deductible expenses. In addition, if you work with a third-party to help you with legal or accounting matters, you may also write off these expenses.
Is your cell phone bill a startup expense? Yes, if you use it primarily and exclusively for business. However, if you use your cellphone for personal and business use, the IRS requires you to divide the cost and only claim the business use as a tax deduction.
How to calculate startup costs
Now that you know the business expenses involved in starting a business. The U.S. Small Business Administration (SBA) offers many resources and tools that can help with these tasks. These include a profit analysis calculator (to calculate your breakeven point), business startup costs calculator, as well as free business counseling.
How to track business expenses
Tracking and managing your expenses will help you stay on top of your financial health and prepare for tax season. The first step to doing this is to separate your personal and business finances. Having a designated business bank account and credit card makes it much easier to record and track your expenses.
Tracking expenses by spreadsheet is ok, but this method can be hard to scale and maintain accuracy. On the other hand, investing in accounting software and the services of an accountant can help ensure accurate tracking, proper categorization for tax purposes, and report generation. Read more about how to track your small business expenses.
Technology has also made it easier to stay on top of the receipts and invoices generated by startup costs. Mobile apps like Expensify, Concur, FreshBooks, and QuickBooks Expense Tracker let you scan your paperwork on the go, import credit card data, import your expenses into your accounting system, and more.
How to cut business expenses
Once you have a clear picture of your business expenses, find places to cut costs and maximize your profit margin.
Review your quarterly business expense report to identify which expenses are critical and which are not necessary or negotiable. For instance, you may be able to reduce inventory costs by setting up automatic re-orders when inventory gets instead of keeping excess inventory in stock. Also, talk to your cellphone carrier to see if they can offer a cheaper plan based on usage and your number of employees.
What are the biggest expenses for a small business? In most cases, these will be labor, benefits, and taxes. Addressing these costs requires a more aggressive approach. But before you reduce headcount, talk to your tax advisor to find out if you’re overpaying on taxes. You could also consult an employee benefits broker to help develop a custom benefits plan that meets your workforce’s needs while staying within your budget.
Continue to make cuts until you’ve reached your target budget. Here are some top ways to cut small business expenses.
Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.