How to Categorize Expenses for Corporate Travel in the E-commerce Space?

When managing an e-commerce business, every rupee is important. Accurately tracking and categorizing expenses is essential for understanding financial outflows and making informed financial choices. While it might seem tedious, properly organizing your costs will benefit you long-term.

This detailed guide will outline how to categorize expenses for your e-commerce business. We’ll also share tips on organizing these costs to analyze your spending patterns and budgets. An effective expense tracking system will give you financial insights to help your business succeed.

Let us look at the various expenses in the e-commerce space and learn how to categorize the expenses:

Various Types of Expenses in E-commerce Space

The E-commerce space has different types of expenses. Let us look at some of them below:

1. Fixed vs Variable Expenses

One of the most fundamental distinctions to make when categorizing expenses in e-commerce is between fixed and variable expenses. This will help you understand how your costs scale as your business grows.

Fixed expenses stay the same regardless of sales or output volume. For example, rent for your warehouse or office space is usually a fixed cost, as is the salary you pay yourself or your employees. You have to pay these expenses even if you don’t make any sales in a given month.

Variable expenses are costs that fluctuate based on sales or production levels. For example, payment processing fees are variable because they increase with a higher number of transactions. Likewise, shipping costs are variable since they rise when more products are shipped due to increased sales volumes.

Some common fixed costs in e-commerce include:

• Rent
• Salaries & benefits
• Office Supplies
• Software subscriptions
• Insurance

Some variable expenses include:

• Cost of goods sold
• Merchant processing fees
• Shipping & fulfillment
• Marketing expenses like ads
• Packaging materials

Knowing the difference between fixed and variable expenses allows you to predict how your total costs will change as sales grow or decline. This helps with budgeting and ensuring the business model is profitable. You will also understand how to categorize expenses for e-commerce based on fixed and variable.

3. Direct vs. Indirect Expenses

When categorizing expenses in e-commerce, it’s important to differentiate between direct and indirect costs.

Direct expenses are costs directly linked to the production or acquisition of a specific product or service. For an e-commerce business, examples of direct expenses include:

• Product costs: Payments to suppliers for inventory
• Shipping costs: Charges for delivering products to customers
• Payment processing fees: Charges for handling customer payments
• Packaging costs: Expenses for packaging materials used for shipping products

Indirect expenses, on the other hand, are costs not directly associated with a specific product or service. These are often called “overhead costs” and support the business’s general operations. Examples of indirect expenses include:

• Rent: Costs for warehouse or office space
• Utilities: Expenses for electricity, gas, water, etc.
• Insurance: Coverage for property, liability, etc.
• Accounting fees: Payments made to an accountant or bookkeeper
• Office supplies: General supplies such as paper, pens, and computers

The main distinction is that direct expenses can be traced back to a specific product or service, while indirect expenses relate to broader operational costs. Correctly categorizing expenses in e-commerce can provide valuable insights into the profitability of individual products and the overall financial health of your business.

4. Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) refers to the direct costs of producing a company’s goods or services. It includes all expenses directly tied to production, such as:

• Raw materials : the components or ingredients needed to manufacture a product. For example, fabric for clothing, wood for furniture, ingredients for food products, etc.
• Direct labor : the wages paid to employees directly involved in making the products. This includes factory workers, production supervisors, etc.
• Manufacturing overhead : other production costs like electricity, equipment rental, factory maintenance, insurance on production facilities, etc.

COGS does not include how to categorize expenses like administrative costs, marketing, or distribution. It only covers those expenses directly tied to creating the product itself.

Some common examples of COGS for e-commerce businesses:

• Online retailer : the wholesale cost of the merchandise, import duties, freight, and warehouse costs for stored inventory.
• Software as a Service (SaaS) : server usage, data fees, software licenses, and technical support for running the platform.
• Subscription box : the products included packaging, shipping materials, and production labor.
• Online course creator : video production costs, course author fees, and course software.

Accurately classification of expenses is direct production costs as COGS is critical for e-commerce accounting and determining profit margins.

5. One-Time vs Recurring Expenses

Understanding how to categorize expenses in e-commerce, it’s important to distinguish between one-time and recurring payments.

One-time expenses are costs that occur only once and are not expected to occur regularly. These expenses are typically significant investments or purchases not repeated in business operations. Examples include buying new equipment, setting up a new office, or making a large-batch purchase of inventory.

Recurring Expenses are predictable costs that occur regularly and are necessary for a business’s ongoing operations. They are often paid monthly, quarterly, or annually. Examples include rent, utilities, salaries, and subscription services. Recurring expenses are integral to maintaining the business’s daily functions and long-term sustainability.

Examples include:

• Domain registration and website development
• Incorporation fees
• Purchase of equipment and tools
• Office furniture
• Custom branding assets (logo, branding guidelines, etc.)

Recurring expenses are costs you pay on an ongoing basis to run your e-commerce operations. These include:

• Hosting, domain renewal, and other web maintenance fees
• Subscription fees for tools and software
• Rent and utilities
• Payroll
• Inventory purchases
• Shipping supplies
• Marketing and advertising spend

Knowing how to categorize expenses for e-commerce allows you to budget appropriately. One-time costs are fixed setup costs while recurring costs are variable operating expenses that fluctuate monthly.

Categorizing expenses for e-commerce separately allows you to accurately project future cash flow needs as your business grows. Analyzing one-time vs. recurring expenses will provide key insights into the overhead required to sustain and scale your e-commerce venture.

6. Logistics & Fulfillment Expenses

Logistics and fulfillment costs are crucial expenses for any e-commerce business. These costs encompass everything in storing inventory, packing, shipping orders, and delivering products to customers.

Some typical examples of logistics and fulfillment expenses include:

• Warehousing and storage costs include renting warehouse space and storage facilities to store your inventory. These costs increase as the amount of inventory you hold grows.
• Fulfillment fees: Many e-commerce businesses outsource order fulfillment to third-party logistics (3PL) providers, which charge fees for picking, packing, and shipping customer orders on your behalf.
• Packaging supplies: All materials needed for shipping products, such as boxes, bubble wrap, tape, and labels.
• Shipping supplies: Items like packing slips, return labels, and other shipping-related materials.
• Postage and shipping fees: The actual costs paid to carriers for delivering packages, which can vary based on the carrier, delivery speed, and package weight.
• Delivery personnel: If you manage fulfillment in-house, this includes the labor costs of employees involved in the fulfillment process.
• Returns processing: Costs related to handling customer returns, including receiving, processing, and reshipping items. This may also involve budgeting for returned or defective inventory.
• Inventory management software: Tools for efficiently managing and tracking inventory across multiple locations and sales channels.

Let itilite Handle Your Company’s Expenses

This classification of expenses can help organizations stay up to date on every expense incurred and maintain financial records, improving the company’s overall growth. However, manually classifying expenses can be time-consuming and tedious, impacting productivity. This is why you need robust expense management software to help you with such tasks.

itilite SaaS-based expense management software helps you seamlessly classify expenses and create expense reports. With itilite, you can streamline expense management for your business by automating expense reporting. The software lets your employees scan and submit their receipts on the go and automatically creates an expense report. 

Schedule a demo now to learn more about how automated expense management works.