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Finance 101
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.
15 January 2026 5 min readBy ereQa Team · Editorial team at ereQa
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.
What the NRS will actually let you deduct
A category is only useful if it survives contact with a tax return. Under the Nigeria Tax Act 2025 an expense is deductible when it is incurred wholly and exclusively for the business and you can evidence it. In practice that turns the five categories above into three questions for every line: was it for the business, is there a document, and does the document carry the supplier's TIN where VAT was charged.
| Category | Deductible? | What the evidence looks like |
|---|---|---|
| Payroll | Yes | Payslips, PAYE remittance receipts, pension schedules |
| Rent & utilities | Yes, business share only | Tenancy agreement, receipts; apportion a home office by floor area |
| Software & subscriptions | Yes | Card statement line plus the vendor invoice, converted to Naira at the date paid |
| Marketing | Yes | Ad platform invoices; Meta and Google invoices carry 7.5% VAT you can reclaim if registered |
| Professional services | Yes | The adviser’s invoice with their TIN; your WHT credit note if you deducted |
| Entertainment, fines, personal spend | No | Record them anyway so the bank statement reconciles, tagged as non-deductible |
Categories 6 to 10: the ones that catch people out
Five categories cover most of the money. Five more cover most of the arguments with an accountant.
- Bank charges. Transfer fees, SMS alerts, the ₦50 electronic money transfer levy on receipts of ₦10,000 and above, and the 7.5% VAT on all of them. Small individually; thousands of Naira a month in aggregate, and fully deductible.
- Transport and fuel. Deductible for business journeys, not the commute. Keep a simple log — date, destination, purpose — because this is the category most often queried.
- Equipment. A laptop is not an expense in the year you buy it; it is a capital asset written off over several years. Tag it separately so it does not distort the month it was bought.
- Withholding tax suffered. Not an expense at all, but it arrives looking like one: a client pays ₦95,000 against a ₦100,000 invoice. Record the ₦5,000 as tax credit, not as a discount, or you will pay it twice.
- Owner drawings. Money you take out is not salary and not an expense. Tag it as drawings so the profit figure stays honest.
Categorising a bank statement line by line
The practical problem is not deciding the categories; it is applying them to 300 bank statement lines in a sitting. Three rules make it fast. First, categorise by payee, not by amount: every line to MTN is telecoms, every line to a landlord is rent, and once the rule exists it applies itself. Second, resolve the unknowns weekly, while you still remember what the ₦42,000 transfer on Tuesday was. Third, keep an “ask accountant” tag for genuine doubt rather than guessing — a dozen flagged lines at year end is a ten-minute conversation; a dozen guesses is an amended return.
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.
eT
ereQa Team
Editorial team at ereQa
Written by the people who build ereQa, with Nigerian tax content checked against the Nigeria Tax Act 2025 and the NRS guidance current at publication. General information, not tax advice.
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