How To Categorize Expenses: 4 Tips For SaaS Startups
Expense categorisation is like organising your financial closet - it may not be the most glamorous task, but it's essential for managing your business resources well.
In this article, we will discuss four basic categories used for distinguishing expenses: fixed costs, variable costs, operating expenses, and capital expenses—and how to sort these into your budget plan for better financial management.
This will help you align your finances with your business needs. Let’s dive in!
What type of expenses fall under each category?
Understanding each category can make budgeting and forecasting more precise and meaningful.
Fixed Costs
These expenses do not change regardless of the level of goods or services your SaaS startups produce.
Examples include rent, salaries, insurance, and depreciation. These consistent and predictable costs make them easier to budget for in your financial planning.
Variable Costs
Variable costs, such as COGS, sales commissions, and software subscriptions, change in accordance with your production level.
As a SaaS business, you might also experience cloud storage, data processing, and advertising costs—which fluctuate depending on the demand for your services or the success of your campaigns.
Operating Expenses
Operating expenses are costs associated with running your business daily. These cost areas consist of office supplies, travel expenses, and utilities. Others include employee benefits, legal and accounting fees, and overheads like phone and internet services.
Capital Expenses
Capital expenses are incurred when a business makes a substantial physical or financial purchase.
This could cover costs such as buying high-value equipment, software development, purchasing a property, or paying for major upgrades. This type of expense is often tied to long-term investments and future growth.
Now that each expense category is clearly defined, it's time to look at some tips on categorising expenses effectively for your SaaS startup.
Related reading: How to Track Your Small Business Expenses Effectively?
How To Efficiently Categorise Expenses for SaaS Startups
Think about it: every expense in your business records should easily fit into one of the above-mentioned categories. If it doesn't, consider why not.
Is it a unique expenditure that doesn't occur regularly? You'll have to decide if such outliers should be made into their own expense category or if they should be rolled into incidental costs.
Choosing the appropriate expense category isn't just an exercise in organization.
It facilitates more accurate financial planning, better tracking of profits and losses, and an increased ability to make informed business decisions. It shapes your understanding of your business's financial health and sustainability.
Below are some tips on accurately categorizing expenses.
Tip 1: Split by function
A simple way to categorize expenses is by the function it serves. These typically include categories like Operational Expenditure (OpEx), Research and development (R&D), and Sales and marketing.
For example:
- Operational costs include staff salaries, hosting services, and office leases.
- Research and Development costs include prototyping costs, testing fees, or payments to independent contractors assisting with product development.
- The sales and marketing category could envelop costs associated with advertising, PR, content creation, and software for gathering business intelligence.
Tip 2: Match expense categorization to goals and metrics
Ensuring your expense categories tie authentically to your objectives and key performance indicators (KPIs) can bolster the utility of tracking these expenditures.
Doing so lets you examine how changes in specific cost areas affect your business metrics.
For instance, if one of your primary goals is customer acquisition, having a distinct marketing and advertising expenditure category could help monitor how your marketing spending influences your customer acquisition cost (CAC).
Tip 3: Establish a rolling budget for variable costs
Fixed budgets may not work well with variable costs since they are unpredictable.
That's when establishing a rolling budget comes into the picture. In a rolling budget, the budget period changes continuously.
If the budget were initially set for a year, as the first month ends, the budget for the next year would include forecasts for the 11 months ahead and the next during which budget planning occurs.
For example, if your cloud storage costs fluctuate due to increased or decreased utilization, apply a rolling budget that can respond to changes and always maintain a 12-month horizon for planning purposes instead of sticking to a rigid annual budget.
Think of a rolling budget as a dynamic planning tool. It can enable you to regularly reassess projected expenses and adapt as volumes of production or sales scales change.
Tip 4: Consider an automated budgeting tool
Given the dynamic nature of SaaS startups and the multiple expense categories, automation can be a real asset.
Automated budgeting tools can help manage, track, and analyze your expenses more efficiently. It may provide insights to optimize costs and improve profitability.
And you can also invest in cross-border payment tools like Inkle to handle global transactions.
Such automated tools are beneficial when dealing with overseas customers or suppliers, as they may save on conversion rates and foreign transaction fees.
- Inkle facilitates intra-group payments between the US and India, with real-time currency conversions and exchange rate tracking.
- It is an easy-to-use platform for US-to-India payments, boasting competitive rates and low transaction fees. Your data is safe with state-of-the-art encryption, and you can track transactions in real-time with notifications.
- Additionally, Inkle integrates with your multi-currency accounts, giving you all your US<>IN payment needs in one place.
Let’s recap!
Optimising budget management for SaaS startups isn't hard; it all boils down to strategic categorisation and monitoring of expenses.
Split expenses by function, align cost categories with goals and metrics, use rolling budgets for unpredictable costs, and consider automated tools for streamlined management.
With proactive planning, you can amp up profitability and ensure financial health.
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