costs

In our last post we looked at budget costs and discovered which were direct and which were indirect. We looked at the differences so you could learn to classify your organisational costs correctly.

Why it’s Important to Understand the Difference

The following are the three main reasons why it’s important for every organisation to understand the difference between direct and indirect costs:

  • Tax Consequences.  Direct and Indirect Costs must be reported separately on various forms and reports in order for your organisation to be in compliance with various regulations and tax requirements.
  • Cash Flow. By properly categorising and tracking both direct and indirect costs, it is possible to deduct certain types of direct and indirect costs and thereby lower one’s tax bill. Lowering the overall expense of your organisation’s tax bill will ultimately result in greater positive cash flow for your group.
  • More Accurate Budget Forecasts. Creating an accurate budget the correctly forecasts revenues and expenses for your group is absolutely vital to ensuring that your group has the cash flow that it needs to meet its obligations so that it remains viable over the long term. 

Once you understand the difference between direct and indirect costs, and take steps to properly categorising your group’s costs, your next steps in the budget process include:

  • Reviewing past finance statements.
  • Taking into account any upcoming factors that might increase or decrease your group’s overhead, and other costs.
  • Create a budget that accurately anticipates the revenues that your organisation will bring in versus expenses in the form of costs that will flow out of your group. 

If you need additional help keeping your direct and indirect costs separate but accounted for, why not contact us for help today? At Admin Bandit, our software is designed to make this and other parts of the budgeting process less of a hassle and nightmare.