The difference between an investment and an expense can be defined as follows;
- An investment denotes spending money with the expectation of receiving a return on the original outlay, hopefully by making a profit.
- An expense is most likely to be a compulsory payment required by the company, yet won’t necessarily reap any financial rewards.
Investments
Conventional investments come with the purchase of real estate, stocks, virtual currencies, gold and other goods that may appreciate in value. Buyers will ‘speculate’ that their initial investment in these items will be worth more in the future should they decide to sell.
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In business terms, an investment can manifest in various guises. For example, you may be leasing a piece of equipment for a fixed amount per month – if you instead choose to purchase this equipment outright, money could be saved in the long run.
Likewise, investing in marketing campaigns or upgrading the company inventory are further examples of spending now to receive later. Hiring staff and paying for subsequent training courses can also be classed as an investment if this helps the business grow.
Poor investments, such as an unproductive advert or hiring inadequate staff, will be classed as an expense if they have an adverse effect on company performance.
Expenses
In business terms, an expense payment is less desirable as every outlay should have profit in mind. However, some payments are completely necessary despite their cost or lack of returns.
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For example, you may have to pay rent on an office space and the subsequent utility bills that come with it. There’s also the cost of phone and internet suppliers, as well as office furniture and equipment. Transport is also classified as an expense if used for business purposes.
One of the most substantial expenses comes with paying insurance premiums, something which is not classed as an investment despite the protection it provides. There’s many types of policy to consider, such as liability insurance, property insurance and workers’ compensation insurance, as well as bespoke plans related to your business.
Ideally, you’ll be spending as little as possible on your expenses. This will allow more freedom for investments and thus growing the company. Understanding the difference between the two terms can also have tax implications as some expenses can be claimed on; you should seek the advice of a professional accountant to fully understand your options in this respect.
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