Business Expenses

Startup costs

A business spends money before it sells anything. Startup costs are the one-time expenditures associated with launching a new business or product, plus the initial expenses incurred while establishing the business.

One-time expenditures include legal fees, incorporation and licensing fees, and in some cases equipment purchases, such as the ovens a bakery buys before it opens.

Initial expenses include occupancy expense (rent on the space), research and development, marketing, insurance, and the cost of producing or buying the business's first inventory. All of these expenses become ongoing once the business begins operating. The rent, the marketing, the insurance and the inventory keep coming for as long as the doors are open, so a startup budget is also a first look at the monthly bills.

Direct and indirect costs

Once a business is open, it classifies its recurring costs as direct or indirect. Direct costs are tied to producing or delivering specific goods or services. Indirect costs, also called operating expenses, are the costs of running the business.

For a business that produces goods, the direct costs are called the cost of goods sold (COGS). COGS typically includes the cost of raw materials, production supplies, production-related wages and benefits, and the cost to operate manufacturing facilities. For the candle company, that is wax and jars, the wages of the people pouring candles, and the cost of running the workshop.

For a business that provides services, the direct costs are called cost of sales. They include direct labor expenses, travel costs and any materials used to deliver the service. A landscaping company's cost of sales includes the crew's wages for the hours they work on customers' yards, gas for driving to each job, and the mulch it spreads.

Operating expenses are the indirect costs: occupancy expenses, salaries and benefits for office and sales staff, marketing and advertising, supplies, utilities, maintenance and insurance. They are typically fixed.

Fixed or variable

Recurring costs can also be sorted a second way. Fixed expenses do not change with production or service levels. Variable expenses increase as production or service levels increase.

This is a separate question from direct or indirect, and COGS shows why. Its components can be either kind: rent for a factory is fixed, while the cost of raw materials is variable. Operating expenses, on the other hand, are typically fixed, because office rent and the bookkeeper's salary are the same in a slow month and a busy one.

Insurance

Businesses and consumers buy insurance to protect against financial losses from accidents, injuries or property damage. Some insurance is required. Workers compensation insurance, which covers employees who are hurt on the job, is the standard example. Much of the rest is optional, and businesses vary in how much risk they are willing to accept and how much they will pay to reduce it. In almost every state, a landscaping company with a crew of six has to carry workers compensation insurance, but its owner may decide a $600 leaf blower is not worth insuring against theft.

Consumers face the same choice. One phone owner pays every month for coverage against a cracked screen. Another decides to take the risk and keep the money.