To hold running and developing, a agency has many costs and understanding them in element may be very critical for appropriate monetary control, specifically regarding fees and fees.
Well, those ideas, even though related, are specific — every one refers to a type of company expense.
In this content, you will apprehend the distinction between prices and charges, in addition to see sensible examples of each and find out about the significance of making the ideal class.
What is cost?
Cost is the company’s expenditure related to the execution of its core business . If you have a small cosmetics industry, for example, costs are the expenses related to the manufacturing of these products.
Examples of company costs
To make it clearer, here is a list of common examples of company costs:
- Purchase of raw materials;
- Machinery and equipment maintenance;
- Electricity for the production area;
- Rental of space for production;
- Payroll for the team involved in the production process;
What is expense?
Expenses are expenses related to the company’s administration. After all, a business doesn’t only depend on production, right? For it to work, it needs to have management, sales, finance, marketing , among other areas.
All expenses that are not related to production, but rather to administration, are considered expenses.
Examples of company expenses
These are some examples of expenses:
- Water, electricity and internet bills;
- Space rental;
- Office supplies;
- Cleaning materials;
- Administrative staff payroll;
- Investment in advertising and publicity;
- Subscriptions to software used for management.
What is the difference between cost and expense?
As you have seen, costs and expenses are necessary expenses for a company to operate. However, there is a difference between them.
Costs communicate over with fees that are immediately associated with the production of goods or provision of offerings . In different words, they’re investments in the manufacture of merchandise with the intention to be offered later and will generate sales for the enterprise employer.
Expenses are related to the costs necessary to maintain the operation , but which are not directly connected to production.
And what are investments?
The concept of investment also tends to confuse entrepreneurs , especially those who are taking their first steps on this journey.
Investment is an amount allotted to activities that have the potential to carry monetary returns to the company. Costs, consequently, may be taken into consideration investments, due to the fact the amount spent on uncooked substances, as an instance, will bring monetary returns within the form of earnings after the product is offered.
Expenses can not be taken into consideration investments, as they’re no longer directly associated with sales technology.
How to classify costs and expenses?
Now which you realize what fees and charges are, how approximately we speak approximately their category? Both sorts of charges may be categorized as fixed or variable. Find out greater!
Fixed prices and costs
Fixed costs and prices are the ones that do not range from one month to the next . In different words, the agency will pay the same quantity every month, regardless of the quantity of manufacturing or income.
One example is the employees’ payroll, since they receive the same salary every month, as we have already discussed here. Another example is the internet bill, which does not vary according to the company’s sales results.
Variable costs and expenses
Variable costs and expenses, as you can imagine, are those that vary according to the volume produced or sold .
Some examples are the purchase of raw materials, payment of sales commission, gifts offered to customers for each deal closed, among other things.
Advertising and marketing expenses, for example, which do not occur every month, are also considered variable expenses. In addition, the amount spent on these actions may vary depending on the season.
How important is it to correctly classify costs and expenses?
As you can imagine, correctly separating the company’s expenses between costs and expenses will help financial management in many ways.
The first of these is gaining knowledge about your own business . And this knowledge will be used at practically every moment, from purchasing new materials to making more strategic decisions.
Cost and expense classification also allows managers to understand which expenses are really necessary and which can be cut. This way, if necessary, it is possible to reduce the company’s costs without compromising the quality of its production and customer service.
Knowing your costs and expenses also helps you price your products and services. And you know how important this is, don’t you? Pricing ensures that sales are actually generating profits and not just paying the bills (or worse, making a loss).
For all these reasons, classifying and recording these expenses must be a routine activity within the business!
How to analyze company costs and expenses?
The first step is to list costs and expenses separately, being careful not to leave anything out.
With the lists ready, it’s time to analyze whether production costs are in line with the quantity and quality of products sold. It’s important that costs are lower than revenues so that sales are profitable !
Then, you must carefully analyze each expense to understand whether it can be reduced or cut without compromising production quality — this can free up resources for more strategic investments or prevent the company from going into debt.
This process does not need to be done every day, but it should be repeated periodically so that management does not lose full control over costs and expenses — this is essential to maintain the financial health of the business!