Definition of Expenses

Expenses refer to all costs and expenditures that an entity incurs during the conduct of its ordinary business activities, whether directly related to production or to administrative and marketing operations. Expenses represent outgoing cash flows or financial obligations arising from the consumption of resources or obtaining services, and are recorded accounting-wise according to the accrual principle in the period in which they occur.

Basic Types of Expenses

Expenses vary according to their nature and function in business operations, with each type having different accounting and administrative characteristics:

• Operating Expenses: Daily costs necessary for running the business such as salaries, rent, utilities, and maintenance

• Selling Expenses: All costs related to promoting and selling products such as sales team salaries, commissions, advertising, marketing campaigns, and travel expenses for presentations

• Capital Expenses: Long-term investments in assets such as equipment and buildings that are depreciated over several years

• Direct Expenses: Costs that can be directly linked to a specific product or service such as raw materials and direct labor wages

• Indirect Expenses: General costs that support overall operations such as general management salaries, insurance, and support services

• Fixed Expenses: Costs that remain constant regardless of activity level such as rent and insurance

• Variable Expenses: Costs that change with changes in production volume or activity such as raw materials and consumed electricity

Practical Example of Expenses

A technology services company in Riyadh incurs the following monthly expenses:

Date: June 2025

• Operating Expenses: Employee salaries SAR 85,000 + Office rent SAR 18,000
• Sales and Marketing Expenses: Sales commissions SAR 12,000 + Digital advertising SAR 8,500
• Direct Expenses: Server and software costs for projects SAR 25,000
• Indirect Expenses: Electricity and internet SAR 4,500 + Administrative services SAR 8,500
• Total Monthly Expenses: SAR 161,500

Importance in Financial Management

Expenses play a pivotal role in determining business profitability and financial success on several levels:

• Direct Impact on Profitability: Expenses are deducted from revenues to determine net profit, so managing them efficiently directly affects the company's financial results

• Foundation of Financial Planning: Understanding expense patterns is necessary for preparing budgets and forecasting future cash flows

• Indicator of Operational Efficiency: The expense-to-revenue ratio is used to measure management efficiency and compare with competitors

• Tax Compliance: Proper recording of expenses is necessary for compliance with the Zakat, Tax and Customs Authority requirements and for accurately determining the tax base

Accounting Treatment of Expenses

Expenses are recorded accounting-wise in different ways according to their type and timing of occurrence:

• Basic Entry: Expenses are recorded on the debit side and matched with a credit account such as cash, creditors, or accrued expenses

• Accrual Principle: Expenses are recorded when they occur, not when they are paid in cash, ensuring matching of expenses with revenues in the same period

• Value Added Tax: In Saudi Arabia, a 15% tax is applied to most expenses, and registered companies can recover it

• Prepaid Expenses: Payments for future services are recorded as assets and then gradually converted to expenses

Expense Management Cycle

The expense management process goes through organized stages to ensure control and efficiency:

1. Planning and Budgeting

Determining expected expenses and allocating resources based on business objectives and financial capabilities

2. Approval and Authorization

Setting clear authority limits to ensure appropriate approval of expenses according to their value and importance

3. Recording and Monitoring

Accurately documenting all expenses and monitoring budget implementation and early detection of deviations

4. Review and Analysis

Periodic evaluation of expense management effectiveness and identifying opportunities for improvement and savings

Common Challenges in Expense Management

Companies face various challenges in managing their expenses that require strategic solutions and flexibility in implementation:

• Weak Internal Control: Lack of effective control systems may lead to spending violations or non-compliance with approved policies

• Balance Between Efficiency and Flexibility: Finding the right balance between strict control and the flexibility necessary for operational efficiency

• Price Fluctuations: Changes in material and service prices affect the accuracy of planning and budgets

• Technical System Complexity: Managing multiple and non-integrated systems increases complexity and reduces efficiency