Business Expenditure Explained

In brief, a business is made up of income and expenditure, assets and liabilities. Income is everything you receive, everything you sell and the money you get from your customers. The expenditure is everything that leaves the business. Expenses, payments etc. For a plumbing and heating business, there are loads of expenses or outgoings which are required to have a business that runs effectively.

A lot of people choose to do their bookkeeping in-house, as opposed to using a skilled and experienced bookkeeper. If you choose to complete your bookkeeping yourself, it is very important that you categorise your expenditure correctly, are aware of the variety of VAT rules and have a lot of time that can be devoted to this side of the business.

Having accurate bookkeeping will mean you can place reliance on management accounts which will paint a clear picture of your business's historical financial affairs, enabling you to pick out trends to be able to plan for the future.

While working on the books, either processing purchase invoices or allocating bank payments, it is very important to correctly categorise your expenditure into the most relevant nominal accounts.

What’s a nominal account? - A nominal account is an account in which accounting transactions are stored for one fiscal year.

This article looks at the different nominal accounts from a plumbing and heating businesses perspective.

Expenditure

·         Purchases (cost of sales, direct costs) - These are costs which are made up of everything which you re sell. It represents the direct costs related to the manufacturing or purchasing of a good that is sold to a customer. For example, you have to buy a boiler in order to sell it. The cost of sale is the boiler you purchased along with all of its ancillaries.

·         Direct labour costs – This is the labour costs directly attributable to making sales. For example, a boiler installer engineer. Note: If you’ve got office or admin staff then they wouldn’t be classified as a cost of sales because they’re not a cost directly attributable to selling or making you revenue.

·         Advertising – To generate leads or enquiries within your business. This could be anything from Facebook, Checkatrade, Google Ads etc.

·         Association memberships – These are the costs relating to any associations that you may be part of. For example HIES - a leading consumer protection organisation covering the installation of home energy products.

·         Audit and Accountancy fees – This is the cost of your accountant. Receiving tax advice, telephone support, payroll, completing VAT returns, year-end accounts, audit and potentially business advice. Any service which your accountant offers will fall under this. Here is a list of Together We Count’s services to give you an idea.

·         Bad debt write-offs – This is when you have chased a customer and they have not paid you. To clear the debtor from your sales ledger you then need to write of the expense to the bad debt in your profit and loss account.

·         Bank charges – This is anything your bank charges you, such as your monthly fee to have a business bank account, if you make foreign payments there are usually charges for this. Any cost to you from the bank falls under this category.

·         Commission charged – Often within business people will pay commission in order to help generate sales. A lot of letting agents take a cut of a sale and this is where the charge should sit within your accounts.

·         Computer expenses/software – Anything you spend on your IT software (not hardware) this could be your monthly subscription to your CRM system, your accounting software etc

·         Credit card charges – This relates to charges incurred to use your credit card or a PDQ machine.

·        Entertainment - the money paid to employees to cover the cost of meals and other entertainment incurred while doing their job

·         Equipment hire – This refers to when you hire equipment to complete a job. This could be anything from scaffolding, generators, tools, toilets to diggers. Literally, anything you hire for your business.

·         Health and safety – Anything you spend on PPE, anything Covid related like masks and gloves, the costs of running an H&S management system and the initiatives associated with promoting and securing H&S in the company.

·         Insurance - expenditure paid to acquire an insurance contract. This expense is incurred for all insurance contracts, including property, liability, and medical insurance. Note motor insurance should be included within vehicle costs.

·         Interest paid - is the cost of borrowed funds.

·         Legal professional – This is any fees you pay to your solicitor or legal team. It includes obtaining contracts, service level agreements or seeking legal advice.

·         Licenses and subscriptions – These are usually your accreditations.  For example, money to OFTEC or MCS or Constructionline.

·         Postage – this is all the fees you pay for posting letters such as stamps and franking machines.

·         Protective clothing – If you were to buy new boots or any business-related clothing, this is the category it would fall under.

·         Rents and rates – This is usually a monthly or quarterly fee which is in relation to your monthly rent expenditure.

·         Repairs and renewals – This is anything which you repair or renew within your business premises. Not to be confused with cost of sales.

·         Sponsorship – You may sponsor a local football team, charity or boxing club etc. This is the category to use if you are providing sponsorship to a cause.

·         Staff pensions – Due to legislation you now need to auto-enrol your employees to join a pension scheme. You need to make an employer's contribution and this is where your side of the transaction would go.

·         Staff recruitment – often plumbing and heating businesses need to seek the services of recruitment agencies to hire new staff. They often charge a percentage of the salary advertised. This is where that cost would be posted.

·         Staff training - Expenses for employee training and staff development programs and courses directly related to employee work duties and responsibilities.

·         Stationery - Any costs you incur for general office supplies, such as paper for printing, pens, and envelopes, can be claimed as a stationary expense.

·         Vehicle Costs – costs relating to the vehicle from fuel, MOTs, services, insurance, road tax, cleaning the car, vehicle tracking costs etc.

·         Vehicle Leases – This could be the monthly expenditure for you leasing vehicles.

 

If you have found this article useful you may be interested in Together We Count’s ‘Business in a Box’ – a database of carefully compiled and regularly updated resources for a plumbing and heating business. For more information please contact info@togetherwecount.co.uk.