A Business Owner’s Guide to Analyzing Business Expenses

For a small business, earning more revenue is not enough to grow. It also has to keep an eye on expenses, understanding where and how much your business is spending. Business expenses, if left unchecked, can often overshadow profits, potentially pushing your business into the vicious circle of debt and disaster.

An in-depth business expense analysis can help identify pending payments or reimbursements, non-compliant spends, rising utility costs, and inventory expenses. It not only calculates your spending but also provides valuable insights on how to better utilize the revenue you have, create informed budgets and financial strategies, manage cash flow, and introduce cost-saving measures for optimal resource use.

What Type of Business Expenses Should You Analyze?

There are four main types of business expenses that should be analyzed to get a clear picture of where your business is spending more:

• Fixed costs, such as rent, property tax, and employees’ salaries that you have to bear regardless of whether your business is doing well or not, can impact your profitability in a big way.
• Variable costs, such as raw materials, utilities, and shipping, that vary with production volume offer greater scope for cost-cutting and strategic planning.
• Non-Cash expenses, such as depreciation and amortization, calculate the value of your business assets and divide the one-time capital cost over several years.
• One-time expenses, such as fees for various permits and licenses, may be a one-time cost but are nevertheless a significant and important expense for the business.

All these expenses have to be thoroughly reviewed and analyzed to get a complete expense profile and identify areas for improvement.

How to Analyze Business Expenses

Now that we understand the what and the why of business expenses analysis, let us take a look at how to actually put it into practice. The first step is to gather all your expense records, including receipts, invoices, bank statements, and cash statements. Then, divide all these expenses into the four expense categories given above – fixed, variable, non-cash, and one-time.

And now, it’s time to dive into the real thing. There are many ways to analyze business expenses. The right method depends on what you actually wish to analyze.

1. Trend Analysis

It examines how your business expenses have changed over time (monthly, quarterly, or annually), by season, and by cycle. For instance, comparing historical peak-season inventory costs can give you an idea of how effectively you are using your inventory space and how you can better manage it.

Trend analysis can help you spot spending patterns or trends, shine a spotlight on any particular period of high or low spending in a year, and even check the effectiveness of your cost-cutting strategies. These insights are not just figures; they are a window to your future spending behaviour. Depending on the results of this analysis, you can tweak spending or inject funds into areas where they are needed to enhance performance and sales. For example, consistently rising maintenance costs and slowing production could signal an opportunity to buy or upgrade equipment and save costs.

2. Variance Analysis

This analysis compares your business’s actual expenses with your budgeted expenses, highlighting over- or under-spending. If your carefully calculated, data-driven, and strategically planned budget sets an upper limit on your travel spend, but your actual travel bills exceed it by 30%, it’s time to take corrective steps. You can check whether the company vehicle is used only for business purposes and review fuel and repair receipts to ensure there is no foul play.

3. Cost Driver Analysis

Cost driver analysis aims to identify which category is driving your business expenses. Highlighting these cost drivers helps you develop innovative plans to cut costs or improve efficiency wherever needed. You can do this by first examining each broad expense category, then focusing on the individual expenses listed under the costliest category.

To give an example, if your variable expenses category is significantly higher than it should be, check which expense under that category is eating up most of the money. If it is your software, you can look for alternative software that is efficient, secure, and affordable.

4. Financial Ratio and Benchmark Analysis

Every business uses various ratios to understand how effectively and efficiently it is making profits and managing its expenses. Ratios standardize all financial data and make it comparable with competitors, helping them set benchmarks.

For instance, the Cost Per Unit ratio (Total Production Costs / Number of Units Produced) helps you know the average cost your business incurs to produce a single product. If it’s too high compared to your peers’, it’s time to find ways to bring down the costs.

Calculating these ratios and comparing them to the benchmarks tells you if your investments and spending are efficient and competitive. If they are higher than expected, your profitability and cash flow are likely to take a hit. If lower, you can reinvest in growth without hurting profits.

Why Seek Professional Help in Expense Analysis

The problem with business expense analysis is the sheer volume of transactions of a growing business, which makes it difficult to compile and manage the data manually. There is a risk of missing important data, incorrect reporting, and incorrect categorization of expenses. Analyzing such erroneous or incomplete data can give a distorted image of the business finances. Making decisions based on such an image can prove to be disastrous.

Professional help can reduce these errors. Accountants can automate and simplify their expense-tracking system so that all departments follow a standardized process, making it easier to compile and analyze expenses. This reduces human error and speeds up data collection and categorization.

Contact DNTW Toronto LLP in North York to Help You with Business Expense Analysis

Talk to a professional accountant to help you set up an accounting system, train staff to input data, and create a dashboard to analyze business expenses at regular intervals. At DNTW Toronto LLP, our accountants can accurately report and track business expenses and provide the necessary insights. To learn more about how DNTW Toronto LLP can provide you with the best accounting services, reach out to us here.