A comparative analysis of direct and indirect expenses
What are expenses?
Expenses are all the costs of running the business, including rent, employee salaries, office supplies and utilities. Business owners should keep track of all their expenses so they can calculate how much money they’re making after expenses. Tracking these expenses can be difficult if you are not following the correct invoicing format or the delivery challan format excel or spreadsheet style. See more.
Spending money on starting a business is one way to build your cash reserves. A good rule of thumb is to set aside 20 per cent of your net income every month for this purpose. You can use this money to pay off debt or invest in other projects that might generate more profit. Most small businesses have an initial expense of setting up the business, which is called “start-up” or “installation” costs.
What are direct expenses?
Direct expenses are the core expenses of a business. These include things like rent, salaries and other costs that don’t involve buying a product or service. For example, if you’re paying your employees to work in your office space, this is an indirect expense. Core expenses are the costs that you incur every day, whether you are in business or not. These include things like rent, utilities and payroll.
If your business is a one-person operation, you will probably have to cover all of these expenses yourself. If you have employees, then you will need to pay for them as well.
But even if you don’t make money from your core business activity, it doesn’t mean that you can ignore these expenses. You can still use them as an opportunity to make money through other activities that complement your core business activity – such as marketing or selling your services.
Most common direct expenses?
In order to keep your business running, you need to make sure that you have enough money in your bank account. This is why it’s important that you don’t spend all of your funds on paying for the rent, raw materials, and other expenses for your business. If you do so, then it will make it harder for you to pay for these things when they come due.
Below are some of the most common items that a small business owner can encounter in a direct expenses list:
- Factory rent or lease
- Raw materials used in manufacturing
- Direct labour and wages for employees
- Manufacturing supplies such as machinery and equipment
What are indirect expenses?
Indirect expenses are the operational expenses of a company. These are the costs that do not directly relate to products or services sold by the company. For example, if a company has an office building, it will pay rent and other related expenses. The exact amount of indirect expenses varies from company to company, but they usually include insurance, utilities and property taxes.
Other examples include:
- Advertising and promotion – this is one of the most common indirect expenses for any business. It is used to attract customers, but it also helps in building brand awareness and loyalty.
- Human resources – human resource costs include salaries, wages and benefits of employees (including benefits). These costs can be divided into direct and indirect categories.
- Supplies – supplies have to be purchased from time to time so as to ensure the smooth operation of an organization. It includes raw materials such as paper, ink or even food items for employees. Other supplies include office equipment like computers and printers.
- Depreciation – depreciation is an accounting term that refers to an expense that decreases the value of a fixed asset over its useful life. For example, when you buy a new computer system for your company, you will have to depreciate its cost over three years before claiming it as a tax deduction on your income tax return.