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Business expense categories explained

GoCardless
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Last editedMar 20234 min read

Keeping track of your business expenses is a vital part of ensuring that you manage the cash flow of your business and stay in control of aspects such as expenses paid and taxes due. Trying to keep track of all the possible business spending categories you might have to deal with can be a complex and time-consuming process, however, particularly when you’re trying to run the rest of your business. In this guide we’ll explain what the most common business expense categories are and how they need to be managed. 

Small business expense categories

The actual definition of an expense is pretty simple – it refers to any money which your business spends in order to bring in more money, known as business revenue. The expenses generated by your business will be the fixed costs for aspects such as the rent on any premises used by your business and the cost of utilities such as heat and water. In general, these expenses can be broken down into different categories.

Business expense categories list

Direct expenses

Direct expenses refer to money which is spent on things which directly impact the central purpose of your business. In most cases direct expenses will deal with money spent on business related purchases or in the production of goods and the provision of services.

Indirect expenses

Indirect expenses refer to money which has to be spent to keep the business running without being directly linked to the goods and/or services which generate the revenue for that business.    

Operating expenses

Operating expenses are those expenses such as administration costs which apply to the work which goes in to selling your goods and services 

Non-operating expenses

Non-operating expenses are expenses which don’t reflect the direct costs of running your business. Examples might include the interest repayable on a bank loan taken out.  

Fixed expenses 

Fixed expenses are those which remain consistent over the medium to longer term, generally when measured on a monthly basis. The cost of renting the premises from which your business is run would be a fixed expense, for example. 

Variable expenses

In most cases the variable expenses a business has to pay are the largest amount every month. The term covers any outgoing that can vary in amount from month to month, such as the fees paid to freelance workers or overtime which is seasonally affected. 

How to track and manage your small business expenses

In general terms, tracking and managing your business expenses can be broken down into four steps:

Open a business account

Keeping your personal and business finances separate is vital, particularly when it comes to keep accurate records for tax purposes. Using a dedicated business account will make it easier to isolate and quantify your business expenses, as long as all business related expenditure passes through the account.  As well as a business cheque account you’ll need a business savings account and a business credit card. Spending in cash isn’t recommended because it only creates one tangible record – a receipt. Digital payments, on the other hand, or payments made using a business credit or debit card, will create a detailed paper and electronic trail that is much easier to work with when accounts need auditing.   

Keep your receipts

Make sure you store business receipts safely, going through all of your receipts at least weekly (daily would be even better) and separating out those relating to business expenses to be stored safely. Storage could take the form of a file folder for each month of the year, or multiple plastic binders to organise all of your receipts by category. Joto down the purpose of the receipt on the receipt itself, as you might forget exactly why you made a purchase when the time to draw your accounts up arrives.   

Many apps now make it easy to scan paper receipts and store them digitally, which is a simpler option in terms of storage, and comes with the added benefit of the app adding the expense to your books. GoCardless integrates seamlessly with accounting software platforms like Xero, to make tracking spending in this way easier than it’s ever been.     

Spreadsheet

If your business is smaller or you feel happier working with low tech solutions a spreadsheet could offer the perfect means of tracking your expenses (although you’ll probably want to switch to something more advanced as your business grows. Expenses will have to be entered manually into the columns and categories you choose to create. The columns you’ll need will include the Date or an expense, the Category, the name of the Vendor, the Cost and the Purpose of the expense.  

Cloud Software

Using cloud based accounting software to track and manage your business accounts comes with the advantage that it can be accessed from anywhere at any time as long as you have a device like a smartphone. Travel expenses can be added as you incur them, for example, and receipts scanned upon purchase to ensure no expense is missed. The fact that the software integrates with your bank account and business credit card means that expenses update automatically every single day, leaving you free to concentrate on running your business.    

Business expense categories and accounting

Keeping clear and up to date expense accounts will enable you to track your businesses expenses and make sure you have sufficient income to cover them all. The expenses recorded in your account should be divided into different categories, rather than being set down on a monthly or weekly basis. These categories could include travel and entertainment expenses, employee salaries and rent on your premises. Separating them in this way will make it easier to track the operation of various parts of your business and spot any which are costing more than you feel they should.  

Most small businesses use cash accounting when keeping track of business expenses. Cash accounting is a method of book-keeping in which the expense is only recorded in the accounts when the actual cash is paid. The alternative is accrual accounting, which records an expense as soon as it has been generated, but sometimes before the actual money has been paid out, and is a more complicated method. Many of the expenses involved in running a small business can legitimately be claimed as allowable expenses when completing a tax return.  These include the following:

  • Employee salaries

  • Software

  • Office supplies

  • Utility bills

  • Travel expenses

  • Marketing

  • Utilities

  • Business insurance

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