5 Expense Categories Every Small Business Should Track
You can't fix what you don't measure. These five expense categories are the difference between a profitable small business and a lifestyle business that just breaks even.
Most failing small businesses don't fail because of bad sales. They fail because of unmeasured expenses creeping up 1% a month until margins disappear. Track these five categories ruthlessly.
1. Payroll (the biggest one)
For service businesses, payroll is typically 40–55% of revenue. Above 60%, you're in trouble. Below 35%, you're probably underpaying or burning out your people.
Track: gross salaries, bonuses, employer taxes (PAYE, NHIS, pension), and contractor payments. Group by department or function so you can spot which areas are growing fastest.
2. Rent & utilities
Office rent, electricity, internet, water, generator diesel. Should be 5–10% of revenue for most SMBs. If you're paying more, it's either a vanity address or your team is too small for the space.
3. Software & subscriptions
The category that creeps. Slack, Notion, Adobe, Google Workspace, that CRM you bought in 2024 — it adds up fast. Aim for 3–8% of revenue. Audit quarterly: cancel anything 3 people on the team can't name when asked.
4. Marketing & customer acquisition
Ads, content, events, agency fees. Should grow as your business grows: 5–15% of revenue. The trick is measuring it against new revenue generated. If marketing is 12% of revenue but generates 25% of new revenue, keep spending. If it's 12% and generates 8%, cut.
5. Professional services
Accountants, lawyers, consultants, freelancers you pay for specific projects. 2–5% of revenue. This is the category most owners under-spend on early — then over-pay later when they have to clean up tax/legal messes that better advice would have prevented.
How to track without a spreadsheet
ereQa lets you tag every expense with a category as you record it. At month-end, you see a clean pie chart of your spending by category, with last month and last quarter comparisons. Spot the categories trending up and investigate before they eat your margin.
Frequently Asked Questions
How granular should my expense categories be?
For most SMBs, 8–15 categories is the sweet spot. Fewer, and you can't see patterns. More, and you spend more time categorising than analysing. Start with the 5 in this article and add sub-categories only when needed.
What's a healthy expense ratio for a service business?
For most service SMBs: payroll 40–55% of revenue, rent/office 5–10%, software 3–8%, marketing 5–15%, professional services 2–5%. Total operating expenses should leave 15–25% net profit margin.
Tunde leads product at ereQa. He has spent the last decade building financial tools for African SMBs and freelancers.
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