Incidental costs are expenses that are necessary for doing business but are small and often unplanned costs. Though they seem minor, incidental expenses can add up. It’s important to manage these business related expenses to keep your finances healthy.
Definition of incidental expenses
Incidental costs (also called incidentals or miscellaneous expenses) are minor costs that come up as part of running a business. They aren’t directly tied to your business’s main activity and they might not be planned for or included in the budget. Incidentals are minor, out-of-pocket expenses that are needed for the running of the business.
Small incidental costs in some businesses might be major expenses in others. For example, small businesses might have to buy stamps to mail documents. For some businesses, this might happen once every three or four months; for others, stamps might be needed every day.
Incidental expenses are the extra business costs you face that besides your main services. Many businesses that have employees who travel frequently have high incidental costs. The employees may pay for them with a credit card, and then file expense reports for expense reimbursement to cover the actual costs of these items.
Types of incidental expenses
There are several areas where businesses have incidental expenses. These areas vary depending on the business type and industry.
Here are some examples of incidental expenses:
- Business travel expenses: As your employees travel, they will incur various costs and fees in addition to the larger costs of air tickets, accommodation and meals. These business trip expenses include tips for hotel and restaurant staff, taxis and toll fees.
- Gifts and celebrations: These expenses can include employee birthday celebrations. Gifts for customers usually have ancillary extras such as wrapping paper, cards, and flowers.
- Team management: These expenses may include staff encouragement awards or snacks for meetings.
How businesses handle incidental expenses
Incidental expenses are necessary for your business to operate smoothly. Because they tend to be smaller and irregular, you might be tempted not to track or manage them. This leads to situations where the expenses can get out of control. Small costs quickly add up.
It’s important to know where your money is going so you can cut unnecessary costs. This helps you better manage your cash flow. Monitoring incidental costs can also help you prevent fraud in your business.
Although they are different, incidental costs are often associated with discretionary costs. Discretionary expenses are optional costs that can be changed based on your needs and available funds. If money is tight, you can control these expenses to focus on essential spending.
Tips for managing your small business incidental expenses
There are steps you can take to manage your small business incidental costs.
- Establish clear guidelines for your business and employees. Clearly define what qualifies as an expense your business will pay for.
- Set travel guidelines like a per diem allowance for business travel to help control incidental costs. The per diem rate is a daily rate meant to cover all costs that might be incurred. You might set a per diem rate of $75, which is meant to cover meals, tips for hotel staff, and miscellaneous costs. If the employee spends more than this reimbursement rate, they pay out of pocket unless they can show a valid business reason for the expense.
- Plan a monthly or quarterly budget for your incidental expenses. This helps you to stay within financial limits and focus on the business expenses that are most important to your operations.
- Monitor and track all incidental expenses. Adjust your policies as your business evolves. A larger business may have more incidental costs than a startup.
- Educate your employees to ensure they understand your policies and know how to report their business expenses. Make sure your reimbursement process is clear and efficient. Employees need to know if they have to submit receipts for business expenses by a deadline, for example.
- Review your expense policies regularly to make sure they meet your business needs. Keep your policies up to date with your business needs. Reviewing your incidentals can also help you make decisions on your pricing. If sales activities result in higher incidental costs, you could increase prices to cover those costs.
- Use expense-tracking software tailored for small businesses. Software allows you to record and categorize your expenses. You can also analyze your patterns to see how your business spends money. With this information you can decide where to cut costs to save money.
Advantages of managing your business incidental expenses
Incidental costs are necessary when running a business. It’s important to manage and track them as they can easily build over time.
Some of the benefits of managing your business incidental expenses are:
- improved financial health by reducing unnecessary costs and preventing financial leakage
- accurate budgeting and forecasting by tracking and reviewing your expense patterns
- better decision-making by having insight into your spending patterns
- enhanced cash flow by controlling incidental expenses
By managing your business incidental expenses, you’ll also improve operational efficiency. For example, if you notice it costs more to mail letters than to invest in a digital file-sharing program, you can switch to the digital program and save money in the long run.
Improving your financial health and operational efficiency will increase confidence in your business. This makes it more attractive to investors, potential partners, and loan providers.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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