There are two types of expenses in a business: direct expenses and indirect expenses. Direct expenses are wholly related to the core of the business and are often fixed costs, like business energy. They can be tracked back to a specific object or department related to necessary operations for the business. Indirect expenses are related to the business and are also necessary. However, they are not as easy to track as direct expenses. Both types of costs are important to control in order to stay profitable. This post will focus on direct expenses; how business owners like you can budget accordingly.
Cost Of Goods
The business could not operate without producing a product. The cost of goods required to make this product is absolutely necessary and unavoidable. It is a direct expense. Business owners can reduce this cost by shopping around. You may be able to find an alternate supplier offering a better price. Buying in bulk is another good way to reduce this direct expense. Negotiating with your supplier for a better price is recommended if you have a good standing relationship. Be careful not to sacrifice quality for a lower cost, however. The cost of goods required to make a product is a direct expense that a business owner may be able to reduce.
Cost Of Transportation
The cost of transportation, also called freight, is a direct expense. You must pay for your materials to reach your manufacturing plant. You also need to transport your finished product to your inventory company warehouse. This is a direct expense. It is completely related to the operation of the business and can be traced back to the item that is being transported. Similar to the cost of materials, you can shop around to reduce your freight costs. There are many transportation companies in operation. Some have better rates than others. Be sure to consider insurance and other polices when looking at freight companies. You do not want to reduce one cost, only to be faced with another issue down the road. Transportation costs are a direct expense that business owners may be able to reduce be comparing freight companies.
Cost Of Production Materials
The goods required to make a product are not the only cost during the production stage of your product. Any production materials used during manufacturing is also a direct expense. The distinction between the two is easily demonstrated by using a furniture company as an example. The wood required to make a chair is a direct expense. It is a one-time, consumable good required to make the product, as detailed in the first paragraph. The glue and nails used to put the wood together to make the chair are production materials. These are also direct expenses, but likely kept on hand to manufacture a variety of products. The business owner can reduce costs by changing the way in which production materials are used. Materials can be applied to different areas, or in a different configuration, as long as the end result is the same. You can also reduce production material costs by shopping around or negotiating a better deal. Again, be careful not to sacrifice quality just to lower your costs. This is one of the most important startup requirements to keep in mind. The cost of production materials are a direct expense that can be reduced by a business owner by speaking with their supplier.
Direct Expense Tracking
There are two direct expense tracking methods that are popular with business owners. These options are LIFO vs FIFO expense tracking. LIFO stands for Last In, First Out. FIFO stands for First In, First Out. There are benefits and downsides to each method, of course. Some business owners find that one tracking methods works better for their business than another. Consider both direct expense tracking tools before deciding how to complete this accounting task.
Direct expenses are completely related to the production of a product and the core operation of your business. They are necessary and unavoidable. However, you should not just be sending money away without a care. You can reduce the cost of these expenses by carefully examining where you purchase your goods that create your product, how these goods get to and from your manufacturing plants and the production materials used. Be sure you consider quality as well as your budget when attempting to lower these costs. This post will help you to correctly identify direct expenses and find ways in which you can reduce them.
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