For businesses across all industries, small, often overlooked expenses can add up quickly.
If you look at these numbers in isolation, they might not seem like a big deal. Without proper scope and management, however, they’ll have a negative impact on your company’s financial health.
Even the U.S. Chamber of Commerce claims that entrepreneurs should add an extra 20 percent to their first-year budget to account for unexpected costs.
Understanding these costs and how they affect your budget is vital for maintaining control over your finances. Let’s explore incidental costs and how they can impact your business.
What Are Incidental Expenses?
An incidental expense is an extra cost that comes with doing business. It typically runs parallel to planned costs, but not always. For example, if you decide to take your team out for dinner, you probably have a budget for the meal, but if you don’t plan for the tip, it becomes an incidental expense.
In most cases, these costs are linked to travel and dining. But there are other instances where unexpected fees can catch you off guard, like needing to make an emergency run to the office supply store for printer ink.
Common Types of Incidental Expenses
Let’s run through a list of some of the most common types of incidental expenses so you can better understand how and when these sneaky costs could show up.
- Office expenses: If you’re buying notebooks, printer ink and coffee for the break room several times a week and not tracking it, you could be losing hundreds of dollars every month.
- Travel expenses: Business travel involves meals, Ubers, hotel stays and tips, which are all easy to underestimate. The cost of a week-long trip can get out of control if you don’t consider these costs.
- Maintenance and repairs: Unexpected maintenance and repairs are necessary to keep things running. If things break down, whether it’s an appliance like the breakroom refrigerator or something bigger, like a computer server, you need to fix it as soon as possible. This usually comes with a hefty price tag.
- Miscellaneous: Miscellaneous expenses will catch you off guard. For example, spontaneously taking a client out for dinner or buying a last-minute software upgrade can be unexpected costs. These expenses are hard to predict, so you need to have a buffer in your budget to account for them.
How Incidental Expenses Affect Your Budget
Now, let’s talk about some of the different ways incidental expenses can directly impact your business budget and long-term success.
Budget Gaps
Say a company budgets $500 per month for office supplies but ends up spending $700 because of frequent unplanned purchases. That’s a $200 gap between their budget and actual expenses.
If the company repeats this spending across multiple categories each month, that’s hundreds of dollars in extra costs every single month. These budget overruns make it hard to stay financially stable, especially for new business owners, and can force you to cut costs in ways you otherwise wouldn’t.
Cash Flow Problems
Your steady revenue may look good on paper, but if incidental expenses are constantly draining your cash reserves, you may fall into financial hardship. These cash flow problems can disrupt operations and damage relationships with suppliers and service providers.
Let’s say a small software development company underestimates the cost of frequent travel for client meetings. Although each trip seems relatively cheap, the cumulative effect of incidental costs can drain the company’s cash flow. This could force the company to delay important payments and even take short-term loans to cover daily expenses.
Profit Margin Reduction
The previous two effects boil down to one central idea: small expenses can and will eat away at your profit margins. Incidental costs, though small individually, collectively reduce the overall profitability of a business.
You might think you’ve been doing well, but it turns out your profits are actually 10 percent smaller each month in unplanned costs, and this adds up quickly. In 10 months, you’ll have lost a whole month of profits to expenses that you can’t quite pinpoint.
This is frustrating for startup founders who want to grow their businesses but can’t figure out why they’re not making any money.
Strategic Planning Disruption
When you’re losing a ton of money to incidental expenses, you can’t allocate funds for new products, research and development, marketing campaigns or business expansions. This can and will slow down your company’s growth.
For example, a tech company planning to launch a new product might find its budget being squeezed by unexpected expenses and have to delay or scale back the launch. Those disruptions impact not only current projects but also the company’s long-term goals and market positioning.
Managing incidental expenses is crucial for financial flexibility, which you need if you’re interested in scaling your business into new markets.
How to Manage Incidental Expenses
Here are some actionable strategies you can use to reduce incidental expenses and take control over your finances.
Track and Monitor All Expenses
If you want to get a handle on hidden or unexpected costs, track and monitor them as soon as you see them. There are plenty of different expense tracking software that you can use to make this process quick and easy.
Spend time researching the various tools so you can find the right fit for your business. Investing in software like this will give you real-time visibility into spending so you can spot and address issues as they arise.
Budget for Incidental Expenses
By allocating a percentage of your budget to incidental costs, you can anticipate them without disrupting your financial plans. This keeps things stable when unexpected expenses arise.
For example, you could budget $100 for a tip when you take your team out to lunch. You might also consider allocating five to 10 percent of your monthly budget for unpredictable costs, so there’s always a reserve for emergency repairs or last-minute travel. This helps with day-to-day finances and gives you much-needed peace of mind.
Educate Employees
Establish and communicate clear policies and procedures to staff so they know what an incidental expense is and how to report it. Conduct training sessions to reinforce these guidelines and promote a culture of accountability and transparency.
For example, getting everyone together for a training session before an annual retreat ensures that employees understand the procedure, which will help with getting extra costs submitted in a timely manner through a mutual reimbursement form.
Provide easy-to-use reporting tools and clear guidelines so employees can manage their expenses responsibly and reduce untracked or incorrectly reported expenses. One of the easiest ways to do this is to send everyone a premade form, which they then send to human resources for processing.
Review and Adjust as Necessary
Regularly review and adjust your budget so you’re always prepared for unexpected or, in some cases, expected costs. Regular audits are also important to verify expenses are accurate and catch any mistakes early.
Use quarterly reviews to review spending, assess your buffer and make adjustments based on your current financial situation. This proactive approach will keep the budget aligned with the company’s financial goals and operational needs.
