Organized Bookkeeping

Business Expenses? How much should they be?

A frequent question from new business owners is how much I be spending?

If you are a new business owner and not used to ‘coloring outside the lines’, like we get used to as employees, this can be a little intimidating at first.

One:  If you overspend, is the IRS going to accept that as a business expense?  The IRS definition is:

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To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

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There is nothing in that definition that money needs to be wisely spent or result in increased sales.  For instance, a hair salon subcontractor probably has chair rental expenses; but doesn’t have too many international travel expenses.  They might if they are an international beautician or barber, but generally, no they would have no out of country travel.

When considering an expense, is it something normal and necessary?  For instance, decorating is a normal business expense, but a therapist might not think to list candles as an operating expense.  Remember to track everything you spend to support your business.

Two:  I get asked a lot:  How much should I spend?  ie.  how much should advertising cost?  How much is Rent?  How much do office supplies cost?

The answer to that is people will charge you as much as you are willing to spend.  They aren’t in charge of your budget, you are.  Part of creating a successful business is deciding what and how much to spend.  Welcome to the deep end of the pool.

How do you decide say, how much you are going to spend on rent?  Research.  Try to find out which neighborhood/location is going to be the most profitable for you.  Find a few sample places to rent.  List the benefits/negatives of each location.  Look at the terms, which is the best for you?  How much work will be required to remodel it?  Is the landlord going to pay for the improvements?  How long is the commitment for?

When you have completed your list, put it down for a day, then talk to your mentor.  Then make a decision.

Three:  Employees, how much will I pay for them?

For most tax jurisdictions, you will pay their salary plus 30% more in taxes.  Most new employer’s faint when they hear that.  However, by the time you add in the state, federal, and local payroll taxes, it’s about that.  It might be less, of course.

The point that I’m making about the 30% is that you should have a budget for it.  Many times when people start off they hire their friends.  Not that there is anything wrong with that.  But your friends aren’t probably planning on putting you into the poor house with unpaid payroll taxes.  It’s better to be honest and say that you aren’t ready to hire anyone, than to do them a favor.  Even if your nephew really needs a job. 🙂

The second point is that many people complain about payroll company processing fees.  There is no law or rule that says that you need to go through a payroll company to process payroll.  But if the $100 a month for the payroll fees are going to drive you into bankruptcy, perhaps your company isn’t profitable enough to have employees.  🙂

So what’s the amount you need to pay?  The correct amount is what is needed to support your business’s revenue and nothing more.