Business expense categories: a list for growing businesses
The ability to accurately track spending is crucial for any well-run business. Knowing where money goes, and which budgets to allocate resources to, gives you full control over your resources and ensures you're not wasting limited funds.
And clear business expense categories make this possible.
If expenses aren't properly categorized, it becomes a detective exercise to find out what you're spending on. But with clear categories - used consistently across the business - finance teams can immediately see where cash has been deployed.
This article sets out the most common and important expense categories, and provides some discussion around why they're particularly relevant today. It then offers a simple, effective way to assign and track these, so you don't have to run yourself ragged.
Business expense categories list
Enough intro. This is what you came here for. Here are the most common, noteworthy, and sometimes overlooked expense categories for small and growing businesses.
Here’s a snapshot of the full list. Keep reading for more discussion of each category.
Payroll: The ongoing cost of employee salaries is likely your largest expense.
Rent: Retail stores and companies with large offices will naturally pay considerable rents.
Utilities: The cost of keeping the lights, heating, and water on in those rented spaces can also be considerable.
Software subscriptions: Perhaps the fastest-growing expense category at present, the average company has dozens of subscriptions running at any one time.
Advertising and marketing: Typically the more you spend on marketing, the faster you can grow.
Travel and entertainment: In-person client visits and sales calls were still enormously useful leading up to the recent crisis. Chances are, they will be again, soon.
Servers and website maintenance: For tech companies, servers can be one of the larger hidden costs of doing business.
Tax: Taxes on payroll and profits can also be large, although proper expense management can help to reduce this.
Business insurance: Whether government mandated or chosen by the company to protect itself, insurance costs can be significant.
Consultants and professional services: Outsourcing and external experts can be an efficient, if costly, use of resources.
Training and learning: Another fast-growing expense category, particularly for startups wanting to instill rock-solid processes and routines.
Equipment and furniture: Anything that’s reusable and intended to last (and be shared) for some time can fall into this category.
Office supplies: These include your small, disposable purchases like pens, paper clips, and notebooks.
Home office setup: 2020 saw plenty of businesses offering one-time allowances for employees to improve their home offices.
Fuel and mileage: Both company cars and employees using their own cars on company time can be reimbursable expenses.
Employee perks: All those small (and sometimes large) things that make employees glad they're part of the team.
[Note: these are not “in order” per se, but we’ve broadly gone from biggest expenditures to smallest.]
For many businesses, payroll is the biggest expense by far. It’s not only that each individual represents tens or hundreds of thousands of dollars (or pounds or euros), it’s that each also usually comes with specific taxes, healthcare costs, and other added extras.
We’ve separated these out in this post, and you should too in your general ledger. But in your head, you should consider them part of the package. Because for successful companies, they’re not optional.
The good news is that employees are usually worth the investment, and replacing them is far more expensive than treating them well.
As the CMOE team writes, “When you invest in your employees, you also invest in the future of your company. It may be the best way to raise the value of your company and secure your place in the market, and it doesn’t have to cost much at all.”
Obviously, for physical shops (especially on High Streets), rent can be a huge expense. And the same goes for large company headquarters.
With the rise of remote work in 2020, many companies began having second thoughts about whether all that office space is really worth it. Retailers don’t have much of a choice, but SaaS startups and other knowledge-based companies may not need as much room as they once did.
Meanwhile, other companies like Zapier are fully remote and always have been. And as time goes by and tastes change, office rent may come to represent a far smaller piece of the typical expense pie.
We've found a nice breakdown of the unique considerations to take into account when renting commercial property.
Utilities are also closely linked to rent, and usually relate to the costs of running a physical office space. Your electricity, wi-fi, air conditioning, water, garbage and recycling costs can all add up quickly.
Again, as more companies embrace flexi- or remote working, the less they’ll need to spend on these.
Along with rent, they’re also an important factor in times of crisis. Even if we typically think of them as nameless, faceless entities, finance teams should ensure they have good relationships with these suppliers. Because when you can’t even use the office for large stretches, you want to be able to negotiate savings to keep costs under control.
Microstartups.org has a nice list of ways to keep your utilities bill down. Everything from water audits to LED light fittings.
Did you know? The average company has at least 25 software subscriptions on the go at once.
Which can represent a major challenge. Just knowing what you’re paying for, and when those payments go out each month or year can be a major juggling exercise.
Staying on top of your subscription management is absolutely essential.
Learn how to track your SaaS subscriptions here.
Advertising and marketing
On top of your in-house marketing talent (which falls under payroll, of course), you’ll also likely spend relatively large amounts on various forms of promotion. Marketing tends to have a direct relationship with growth - the more you spend, the quicker you’ll attract customers, and the faster you’ll grow.
So monitoring a big budget and large range of marketing expenses is a good problem to have.
Typical marketing expenses include social media and search advertising, physical leaflets, stickers and swag, billboards, radio and television, plus agency and freelancer help. Many companies even create an online course to get potential customers engaged.
None of this is particularly cheap, and all of which can easily balloon if you don’t keep a close eye on them.
Travel and entertainment
Another expense category that saw a huge dip in 2020 was travel and entertainment. For many companies - and particularly sales teams - getting out to see prospects and clients is a core part of the role.
On top of sales visits, there are conferences and networking events, and when these involve significant travel, the costs can get up quickly.
The Covid pandemic will have shown some companies that much of that travel was unnecessary. It’s easy enough to sell online or over the phone, and plenty of events have gone fully digital.
But more than likely, it’ll be back in a major way. And as Travelperk explains, we’ll probably see some fascinating business travel innovations as a result.
Servers and website maintenance
Servers are another cost that hit different businesses differently. For smaller companies with a relatively simple website, you barely notice the server cost. It’s hosted through a service, and is never more than a few hundred dollars a year.
But for tech companies, servers are an essential piece of the puzzle. And when you’re hosting data and services for thousands (or millions) of customers at once, servers costs can quickly add up.
Fun fact: Despite Amazon having its own Prime Video arm, Netflix uses Amazon Web Services (AWS) to host its servers. And according to Intricately, it pays nearly $10 million per month for this. Which is a pretty tidy source of passive revenue for Amazon.
We don’t typically think of tax as belonging in the usual list of expenses, because it’s not exactly optional. But you should of course keep a close eye on the amount of tax you’re paying - your government is likely doing the same thing.
Of course, accurately tracking your expenses is an important part of bringing your tax bill down. In most jurisdictions, business expenses are tax-free. So ensuring your employees submit receipts and claim expenses on time will actually save the business some serious money.
Here’s a nice guide on claiming tax relief from Simply Business. Again, while the precise rules are UK-specific, the principles will more or less apply anywhere.
Business insurance falls into a similar place as taxes: it’s usually not optional, and it’ll always be more expensive than you’d hope. And in the UK in particular, National Insurance is essentially tax anyway - just like Social Security in many other countries.
Aside from these large, mandatory insurance schemes, there are also countless options for startup insurance out there. These are more precise - covering things like employment practices to product liability.
Whether or not you take these will depend on your risk levels, and how likely you are to need them, of course. But at the very least, CoverWallet argues that it can save you from a heap of admin: “You don’t want to deal with the hassle of filing paperwork, attending settlements, paying for legal fees, and defending your business from issues that can be prevented from the first place.”
Consultants and professional services
This is an expense category that’s certainly optional, but almost always nice to have. When you’re just starting out, being able to bring in expert help is invaluable. Even the most seasoned entrepreneurs have clear blindspots in their knowledge.
Consultants can often walk right into the first meeting and find countless areas for potential improvement.
Plus, there are some professional services that even larger companies prefer to keep external. Outsourced CFOs and accountancy services may simply be more efficient than having someone in the building, and huge corporations keep advertising and PR agencies on retainers full time.
You might also seek guidance from the best LLC services to ensure everything is in order. Also, LLCs can help you avoid double taxation unless they are structured as corporations.
Thrive Global offers some great reasons why outsourcing is likely good for your business. And just as we saw with marketing costs, the more you’re able to spend on outside help, the more impact you’re likely to have.
Training and learning
Here’s an old expense category that’s gaining new traction in the startup world. Large companies like Toyota and McDonald’s are famous for the quality of their training programs. A Starbucks coffee in Singapore is just as good as one in Seattle - thanks to good training.
Startups are also beginning to view great learning programs as the key to scaling quickly. Investments in knowledge tools like Notion, or specific learning platforms like 360Learning, are growing and growing.
The idea that institutional knowledge leaves when people exit a company is no longer seen as acceptable. And businesses are willing to invest. From the 360Learning team:
“Launching a new training program isn’t as simple as ordering some courses and mandating employee attendance. Companies that enthusiastically barrel forward without the proper planning often suffer from misaligned business goals, overwhelmed L&D departments, and a lack of C-suite buy-in.”
Equipment and furniture
We could probably bundle equipment and furniture in with office supplies, but let’s consider them separately. For one, the lifespan is probably different. Anything meant to be used and discarded will likely fall under office supplies, while objects and items that will stick around for a while and be reused by the whole team are probably equipment and furniture.
This distinction is actually important, too. Equipment and furniture will usually be classed as business assets after a certain period - technically slightly different from “expenses.” This of course means that they’re a good you can use to generate income, through programs like asset-based or inventory financing.
For modern businesses, this includes chairs and sofas, computers, television screens, fridges and storage units, printers and scanners, and other obvious office furniture. All of which have some resale value, and can increase the value of your business.
A relatively small expense for most companies, office supplies are also one of the more quintessential “expenses.” Many of us think first of the pens, paper, and paper clips in an average office, before considering the big ticket items like electricity and insurance.
It may be interesting to consider how your business pays for these items today. In the past, many would have been handled with ad hoc petty cash purchases. You may also have bought in bulk from Office Depot or other major retailers.
Today, office supplies may come from Amazon or other delivery services, and therefore might be paid with the company credit card. And when you have large numbers of these smaller purchases, it’s easy to lose track.
It’s worth looking into virtual cards specifically for making online purchases. They’re fast, secure, and easy to track.
Home office setup
Here’s another category that saw a large boost in 2020. Previously, it was often seen as an employee’s responsibility to kit out their home office - should they so choose. But once working from home became the norm, companies were willing to chip in for new screens, better chairs, and other small necessities.
Whether this was a one-time generosity or a longer-term trend we’ll have to discover in time. It really ties back to the changing attitudes around office space: if you can save on rent and keep employees happy, then flexible work seems like a win/win.
And yet, some companies will never be fully comfortable with this idea. And plenty of employees love the chance to be with colleagues during the day.
In the end, those work from home allowances and one-time setup fees might still exist. But they probably won’t be for everyone, and they may not make the same dent in your company’s bank account as in 2020.
Fuel and mileage
When employees travel by car for work (not to work - a key difference), their fuel costs should be reimbursed. Each country (or state) will have set rates for how much you can reimburse tax-free, so it’s worth looking these up.
On top of this, employees who travel in their own car for work will be able to claim a mileage allowance. This reflects the fact that all travel puts wear and tear on a car, and asking an employee to do this in their personal car is unfair. And of course, this mileage can usually be claimed as a business expense, so it’s another tax saving.
Most employees’ favorite expenses - maybe next to travel - are of course the small gifts and perks the company gives them for their service. These can include snacks and drinks, t-shirts and custom hoodies, team-building activities and retreats, and stickers (of course).
There are also the more serious ones - health insurance, paid time off, parental leave, and more. Which will naturally be wrapped up into both payroll and business insurance, but you may have specific perks which don’t fit those categories.
Particularly during difficult economic times, companies put extra focus on these. Being able to thank and reward employees for their hard work - especially while remote - should be a priority.
“The benefits that will likely get the best response...are ones that address specific challenges in the current environment, such as wellness benefits that address remaining healthy at home, caregiving benefits for parents who have to juggle being educators and work professionals in the middle of the day, and stipends to create ergonomically friendly and productive work environments away from the office.” (Wellable)
When are expenses tax-deductible?
We’ve mentioned a few times here that expenses can be tax-deductible. But not every one of the categories listed above is always tax-deductible. So it’s worth understanding the rules.
In this post, we won’t go into detail on this. Because frankly, you’ll want a qualified tax accountant double-checking your claims for relief. And also, the exact rules will depend on the country or state you’re claiming in. So we can’t make blanket statements here.
But there are two key points that indicate you may be able to claim tax back:
The expense has a clear “business character”: it’s necessary for a company to function or for its employees to do their jobs; and
You have a receipt to prove where the money went.
A very notable case is entertainment. “Entertaining” clients isn’t tax deductible in many jurisdictions, but “business meals” may be. There’s some delineation here between taking a client out for coffee or lunch - where work is clearly going to be discussed - taking them to a sporting event or party just to keep them happy.
The point is, your expense needs to relate directly to business.
And the other key issue - and common source of angst - is receipt collection. To claim expenses, you really need to keep as close to 100% of expense receipts as possible. This can be time-consuming and tedious, and most companies run into issues on a daily basis.
Why business expense categories matter
The main purpose of this post is to highlight the wide range of business expenses you likely already have. But why do these different categories actually matter?
First, as we’ve briefly seen, not all business expenses will be treated the same legally. Some are tax deductible, while others are themselves taxes. It’s important to keep a handle on which is which, and to make sure you stay out of legal trouble.
But the biggest advantage to using clear expense categories to actually know where company money is going. And then, of course, to make smarter business decisions based on what you know.
CFOs and financial planning teams use this information to build budgets, allocate (or reallocate) resources, and to make cuts in times of crisis. Without clear categorization, they only know the total amount spent each quarter, but can’t break it down any further.
Which is a pretty obvious problem. So how can you avoid this issue?
How to categorize expenses for small business
Let’s start with the worst way to categorize expenses. You wait until the end of the month (or year!), then study every credit card bill and expense claim one by one, and assign each payment a category.
That is a colossal waste of any finance team’s time. And it also makes it very hard to make adjustments in real time. By the time you’ve figured out where the money is going, months have gone by and more money has gone!
Good expense categorization is done at the point of payment. When a card transaction is made or an expense claim submitted, the category is identified and matched against that transaction.
And in 2023, this can be easy and instant. Expense categories should be:
Assigned immediately, either by the employee making the payment, or automatically when your card recognizes the supplier.
Applied consistently, with a set list of expenses that makes sense to every team member.
Visible in real time. The finance team should be able to log on and see how much has been spent on each expense any time they want, without having to process piles of paper.
Digitized and cloud-based. To achieve that previous point, all spending records and receipts need to be digital, and accessible from anywhere. No folders on C: drives, and no filing cabinets with printed bank statements.
All of this might sound complicated, but the simple answer is to use tools that do the work for you. You can have a ready-to-use spending process, employee debit cards with individual limits, and automated expense categorization - all set up in less than a week.
So while this article may have been useful, you’re better off letting spend management software worry about it for you, anyway.