Business Management: differentiating costs, expenses and expenses

The business management requires knowledge of the business . However, it is not a beast of seven heads: it is necessary to know how to differentiate the entire financial movement of the company, classifying each item and making its correct distribution among the accounts. In the end, if you have the amounts properly distributed, you will know exactly what happened with the money invested, separating it between costs, expenses and expenses.

It may seem, at first, that the concepts deal with the same thing, after all everything is money that left the company. But, it is not quite like that: each of these names is representing a different account in the company’s balance sheet, and needs to be distributed and classified in its correct destination.

We will understand better how it works by making the entries in the correct accounts and spreading the costs, expenses and expenses, you can know exactly what is happening with the profitability of your company and can have a much more defined financial management , knowing more deeply into your company and knowing where you need to improve the process to make it more efficient.

Stages of financial business management

What are the costs?

All the money you need to invest in order to have your product ready or to provide a service is considered a cost: a value necessary to start or continue the movement of your activity within the company. These costs are proportional to the quantity produced, that is, when you increase production, you must increase the cost.

By correctly distributing the cost figures, you will be able to arrive at what is called a “cost price” – the value that was used to manufacture a product or to perform a service. It is on the cost value that you can calculate the sale value, considering your operating profit margin.

Among the cost values ​​of products or services, we can consider the following:

  • Applied raw materials;
  • Freights paid on the transport of materials, raw materials and goods for resale;
  • Salaries of personnel directly involved in production, sale or services;
  • Inventory costs of products and supplies;
  • Sales commissions ;
  • Social charges (FGTS and INSS) for personnel involved in production, sale or services;
  • Sales taxes (ICMS, PIS, COFINS, IPI, ISS);
  • Boleto, discount or credit card fees.

What are expenses?

As expenses, we must consider everything that a company needs to keep its operation , with purchases made for the commercial, administrative, human resources, marketing etc. areas.

We need to differentiate expenses because they do not maintain a direct link with products, goods or services, although they are necessary to support the sales area, having a direct influence on the company’s profitability.

Expenses should be divided into two distinct groups:

  • Fixed expenses, which include everything that has no variation, regardless of the volume produced by the company, such as:
    • Spending on physical structure;
    • Maintenance of furniture and equipment;
    • Administrative wages etc .;
  • Variable expenses, which are those that vary as the volume produced or sold by the company changes, such as:
    • Overtime, if any;
    • The sales commission, among others.

 

Depending on the need, it is also possible to include semi-fixed or semi-variable expenses, such as the value of electricity, which has a fixed minimum value and a variation required by production. Thus, the energy used in the administrative area can be considered fixed, while that of production is variable, and in this case, the energy of the administration is recorded as an expense, while that used by production is recorded as a direct cost of production.

Consider the following expenses and try to understand why each one has its own classification:

  • Fixed expenses:
    • Pro-labore;
    • Administrative wages;
    • Office supplies;
  • Variable expenses:
    • Salesperson salaries;
    • Telephone bill, electricity and water;
    • Bank rate.

What are expenses?

We consider as expenses all amounts that are not foreseen in the company’s budget, but that we need to invest in order to continue production. Expenses are unpredictable and, in most cases, cannot be passed on to the price of the product or service, and this means that the company has to bear these values.

As expenses, we must consider:

  • Defective part maintenance;
  • A component replacement for any equipment;
  • Technical assistance out of hours and other similar expenses.

This classification should not be seen as just a formality. When analyzing financial management reports , these expenses must be separated so that we have a real idea of ​​the company’s situation .

An expense can happen in a certain period and no longer occur during the rest of the year and, if you enter it as an expense, there will be a brutal difference in the company’s results. Thus, if your company had a lower profit in a month and you find that there was a greater expense with equipment maintenance, you will know that that expense was incidental, not being a frequent cost in the company.

How to improve business management with the distribution of values?

With all amounts properly distributed, you will be able to:

  • Identify if your production costs are within the average;
  • Check if the expenses are above the expected;
  • Analyze the information in more detail, to know which items you can reduce without impairing production – which means increasing profitability.

For efficient business management , you need to have the right tools, such as management software , where the values ​​are posted directly to your own accounts, generating the reports necessary to know the company’s results. By making entries in and out of amounts, checking the values ​​of accounts payable and receivable and knowing your company’s cash flow, you will have the means to make the right decisions regarding the direction you intend to give to your business.

On top of the reports, you can also create strategic planning for the company , knowing where and when you can invest to increase productivity, where you should apply new technologies and how you need to act to outperform the competition.

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