How to Categorize Expenses for Your Small Business

Small businesses need to keep tight control of operating costs to maximize cash flow and profits. If you want to retain money in your business, you need to know where you’re spending and how much. One of the most effective ways to do this is by categorizing your small business expenses which will give you greater insight into your profits and losses.

Here’s how to categorize your small business expenses:

  1. Decide on the right categories for your specific business expenses.
  2. Review and reconcile your bank accounts on a regular basis.
  3. Each time you spend money, determine what you’re spending it on.
  4. Assign that transaction to a category.
  5. Run a “Profit and Loss” report that will identify where you’re spending the most.
  6. Use these categories for accounting to make it easier to prepare your tax documents.

Decide on the Right Categories for Business Expenses

The right categories for a small business will vary depending on the needs of the business owner. For example, a property management business may have dedicated categories for different types of maintenance and repair, while a leasing business may categorize according to the equipment they rent out. You should choose categories depending on how easy they make it to financially manage your business.

Most accounting software like QuickBooks, Xero, or Freshbooks will come with business categories already in place, and you will be able to add or amend them as needed.

Review and Reconcile Your Bank Accounts

The easiest way to stay on top of business finances is to reconcile your bank statements against your accounting software. This is the essence of bookkeeping, and it’s a good habit to review your transactions on a regular basis.

When You Spend Money, Identify What You’re Spending It On

Accurate records are essential to getting your categories right. When you go through your bank transactions, get the details of any spending, and assign it to a business category in your accounting software.

Small Business Expense Categories

Here’s a list of business categories that you can assign spending to. This list is not exhaustive—the names used in your accounting software may be different—but it will give you a good starting point.

 

Payroll and Salary Costs

If you pay a salary or run payroll for your business, you’ll need to categorize whenever you make a payment to employees. You should also categorize payroll taxes and other deductions on your salary costs.

 

Health Insurance

If your business provides you with health insurance and pays premiums on your behalf, be sure to categorize them appropriately. 

 

Retirement Contributions

Use this category for making payments into a business retirement plan, like a 401(K).

 

Employee Benefits

You might pay towards certain other employee benefits. If this is the case, you should categorize those expenses. 

 

Rent or Mortgage Payments

Payments made towards your office lease, rental, or purchase expenses. This might be a separate office, money you expense as a home office deduction, interest on your mortgage payments, or something else. 

 

Utility Bills

Money that you spend on bills like electricity, gas, water, or trash collection. If you work from home, you can deduct a percentage of your household bills depending on how much of your home is used for business.

 

Communications and Internet

Use this category for your mobile and landline expenses. You should also include fees for broadband and other money you pay to get online. 

 

Office Furniture

Include the costs of desks, filing cabinets, chairs, and other money you spend on office furniture.

 

Office Equipment

You can categorize expenses on computers, laptops, mobile phones, printers, and other equipment you use in the course of work. 

 

Office Supplies and Sundries

This is a “catch-all” category for those miscellaneous office costs like postage, copier paper or toner cartridges, stationery, and similar expenses.

 

Maintenance and Repairs

You can expense money you spend to keep your workplace in good order. This might include repainting, replacing lightbulbs, cleaning, repairing equipment, and other similar expenses. 

 

Cars and Other Vehicles

If you use a vehicle to help run your business, you should categorize it as a separate expense. This can include fuel, maintenance, repairs, and other necessary automobile costs. 

 

Business Travel

If you travel for business, and you haven’t categorized your spending elsewhere, you can include it here. This might cover airfares, travel by train, or similar expenses.

 

Accommodation

If you stay away for business, you can categorize the money you spend on hotels or other accommodations. 

 

Conferences and Seminars

If you attend conferences and seminars for your business, you can categorize those costs here. 

 

Professional Fees

If you pay money to an accountant, lawyer, or other professional, include them here. You might also include membership fees for professional associations or publications. 

 

Marketing and Advertising

You can categorize money you spend to market and promote your business. Use this for online and offline advertising, sponsorships, public relations, and similar fees.

 

Payment Processing

Your bank is likely to charge fees for receiving payments from customers. If you take credit or debit cards, you’ll pay a fee to a card provider or a payment portal like PayPal or Stripe. 

 

Software and Subscription Services

If you pay for software like MS Office, Adobe Creative Suite, or other applications, you can categorize them as an expense. You can also include fees charged for other “Software as a Service” tools, web hosting, and similar costs.

 

Insurance

You can categorize the premiums you pay for general liability, professional indemnity, and other types of insurance here.

 

These twenty categories will likely cover most of the expenses incurred by an average small business. You will want to define your own categories for any spending that falls outside what we’ve listed above. 

 

Tracking Spending with Your Profit and Loss Report

You can run a profit and loss (P&L) report within your accounting software, and see how much you’re spending in each category. Most software will allow you to break down your expenses on a month-to-month and year-to-year basis so you can see how things are changing. This will let you zoom in to categories where you’re spending more than you think you should and help you get your costs under control.