If you’re new to owning a business, you are quickly discovering the numerous things you didn’t think about having to do to build a thriving business. Accounting is always one of those things. It’s not that you didn’t realize you needed to handle your books, but more that you didn’t realize how many things you needed to track to ensure continued growth and success for your company. Doing periodic expense analyses is essential! Sure, you knew you would need to track what you are spending in order to make sure you earn more than you spend. For many people, however, the buck stops there!
Why do I need to do an expense analysis?
So you’re thinking, “Why do I need to do an expense analysis? Isn’t it enough to know my bank balance and what I have to spend?” Yeah, that’s a big, fat NO! That isn’t enough. At least not if you don’t want to spiral into debt and get stuck in an eternal black hole in which you will spend the rest of your business days. You have to remember, you’re facing the bleak reality that most new businesses don’t make it to the 5-year mark. Sad, but true.
Doing an expense analysis on a regular basis is also immensely beneficial as your company grows and you begin taking on more staff. Those staff, in addition to their pay and associated payroll taxes, will put in requests for things that they “need” to perform their jobs. You know, like the 3-D printer cartoon above. After viewing your expense analysis you could kindly inform your employee that spending 20% of the company’s revenue on a 3-D printer simply isn’t a viable purchase. Alright, obviously most employees will be asking for actual necessary purchases, but you catch my drift.
What is an expense analysis?
In brief, an expense analysis is: running reports of income made and expenses, figuring out what percentage of your revenue is going towards each expense, and analyzing if you are spending excessively, or not enough, in any particular area.
Who should generate my expense analysis?
Most business owners wear a lot of hats, and sometimes one of those hats is CFO. If you have a CFO, or an accountant, it is advisable to have them perform this analysis on your behalf. Professionals with accounting experience can get these reports pulled quickly, and will be able to help you understand what the numbers mean, and what that means for your business. It is also good to have the help of an accountant, so that if there are changes that need to be made to prevent future problems, they can explain the best ways to implement them. (Hint: Accounting Girl, LLC, provides this service!)
If you feel you need to do this on your own, certain programs like Quickbooks Online make generating the necessary data much easier. I would recommend utilizing such software. This will help not only make things easier and less time consuming, but also ensure accuracy. If you need help learning how to use QBO, the superheroes at Accounting Girl, LLC, can provide phone or desk training.
What do I need to do to generate an expense analysis on my own?
If you decide to give it a go on your own, here is what you need to do:
1. Analyze your income statements
For this, you want to take each operating expense and figure out the actual dollar amount of revenue this took, and what that percentage is. Again, this can be easily done with the current data in your accounting system. Once you pull these numbers, you want to compare them to last month, your rolling average (the last three months), and your year-to-date. It’s also a good idea to look at the same month of the previous year.
If you spot substantial differences in any of these numbers you should determine the cause. If a particular expense is costing you more and more money, knowing why that is will allow you to find a solution so that the expense does not continue to grow.
2. Do a budget comparison
Hopefully, prior to the beginning of your fiscal year, you created a budget. Budget creation is an integral part of of all your on-going accounting throughout the year. It provides markers for you to see if you’re on track, or need to rein some things in. Now your actuals (what an expense really costs) will rarely be spot on, but the budget provides a guideline to know how you’re doing. If you expected to spend $2,000 for the entire year on an expense and in the third quarter it is at $6,000, that’s a definite red flag. You’d better get that resolved quickly!
3. Know your actuals, and track your actuals
There are software programs that will allow you to display your most vital actuals in a “dashboard” format, giving you quick access to your profits, expenses, revenue, and cash flow. Having these actuals available in a dashboard will allow an ongoing expense analysis of sorts. Reviewing your actuals against your budget on a regular basis will help spot dangerous trends, as well as spikes in revenue.
4. Determine industry standards
So, once you have all this data, you may take a look and think you’re doing stellar; maybe you are. However, just because you are operating in a positive cash flow, doesn’t mean your expenses are reasonable. You should find a way to see what other people in the same or similar industries are spending on the same expenses; this is called “Benchmarking.” Often, business owners feel their expenses are reasonable, but when they see what others in their industry spend on the same products or services, they realize that theirs are out of sync! There are services you can pay to give you this data, but a less expensive route would be to ask other people in your industry; most people are willing to share this information to help out a fellow business owner.
I hope this article provided you with some solid information on how to analyze your business finances. If this is something you are confused about, need a little guidance on, or don’t wish to pursue on your own, contact us and we will have an accounting superhero ready to assist you