Businesses are venturing on to different projects from time to time, because of which they incur additional costs. These costs are not part of businesses expenses, but people make the mistake of including them as expenses in financials.
Cost is something that every business keeps an eye on, as it can affect the profitability of their business. Therefore, it is imperative to do a cost-benefit analysis. By doing a cost-benefit analysis, firms can find out if the project is beneficial for them or not.
In addition, you must know the difference between business expenses and project expenditure. Capital and revenue expenditure require different transactions and recordings in the financial statements. So, let's discuss how to separate project expenses from business expenses.
Difference between Project Spend and Businesses Expenses
Before we discuss project spend and business expenses, lets talk about the difference between them. When making financial statements, businesses often record their project expenses under operating expenses. It leads to confusion and affects overall profitability.
Let's find out the difference between both of them. Business's expenses include all the expenses relating to the operations. It is also known as operating expenses. All the administrative and general expenses that the businesses incur for day-to-day operations fall under business expense.
All such expenses will come in the income statement, where you need to deduct them from the gross profit. Examples of operating expenses of business include:
- Depreciation
- Repairs & Maintenance
- Taxes
- Utility bills
Project expenses are all those particular expenses that the business incurs due to a particular project. It includes all the ordinary/customary operations and finance charges.
However, unusual costs, development charges, investment, and other non-operating expenses are not part of these expenses.
For example, the travel expenditure that the businesses incurs for traveling for that particular project will classify as a project expense. Let us move to find out why we should differentiate them.
Why should you Separate Project Spend and Businesses Expense?
A business needs to separate their expenses and project spending from each other to get a clear idea about its financials. It will help them manage their cash flows efficiently and have a clear picture regarding the inflow and the outflow of the money.
In addition, companies also avoid any confusion when creating a balance sheet. Businesses will not be able to get the same amounts in the end due to the inclusion of project spending in the business expense.
Separating project expenditure from business expense is important, especially for small firms. Since they need access to collateral or non-collateral loans, a mistake in their balance sheet can deprive them of the amount they deserve.
Also, small companies don't have huge accounting departments or finance divisions. Therefore, it can be difficult for them to identify the reasons behind the discrepancies in the financial statements, particularly in the balance sheet.
How to Separate Business Expenses and Project Spend?
Now that you are aware of why you need to separate project spending from business expenses, let's move on to the ways to separate them from each other.
1. Create a Separate Budget for Each Project
The first thing you need to do is create a separate budget for any particular project. You must have a clear idea about the costs and expenses you will incur on that project. As a result, you can ensure not to include those projects overheads into the business expenses.
Whenever you take on a new project, you can create a new budget for it. You can keep a record of all the projects' budgets to determine any faults in your income statement or balance sheets as well.
2. Use a Project Management Tool
Making use of technology and tools can do wonders for you. Many project management tools can help you maintain and keep a record of all the expenses in a particular project. Using these tools and solutions, you can easily keep a separate account of each project.
The best part about having project management tools is that you can record all of your items on time. It is much easier to have a clear picture of the expenditure on a project compared to an excel sheet.
3. Get Someone to Keep Track of the Project
Employing a project management tool does make your life convenient, but you still need someone to manage the entire system effectively. In addition, there should be proper management of the project so that you don't exceed the limits for particular items set in the budget.
That is why you need to assign someone the responsibility to overlook everything relating to the project. The person you choose should be trustworthy and capable enough to deal with any issues.
4. Take the Services of a Professional Accountant
Small businesses often have small budgets and cannot afford a finance department or keep a full-time accountant. However, they can always take the services of professional accountants or individuals relating to that field. Accountants can identify and differentiate between the project spend and business expenses.
As a result, they can give accurate statements regarding your business's performance and profitability. Also, it won't burden your finance since it is less costly to take services for creating financial statements rather than hiring a full-time accountant.
5. Review your Transactions
Once you have a financial statement in front of you, the next step is to check its accuracy. You need to go through your records to ensure each item was recorded correctly in the income statement and balance sheet.
If you see anything wrong, you can instantly raise a red flag and go through the financial statements again. While reviewing your financials might sound like a hectic task, it is necessary in order to get accurate information about your company's finances.
Takeaway
We now conclude the article and hope you have a firm understanding of why you should separate business expenses from the project spend. Small businesses make the mistake of mixing them, and it affects their balance sheet and income statement.
With the distinctions mentioned in this piece, you can easily differentiate between expenses relating to project spending and business expenses, which will also help you manage your projects more effectively.
