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Keeping track of numbers is not just for accountants. Business people who monitor the performance of their businesses make more informed business decisions. Analyzing the expenses of a business helps management keep expenses under good control. Expense analysis uses the company's income statement to determine how and where the company is spending its money. Expenses in a company are necessary, but the expenses should be kept as low as possible compared to the revenue. The lower the expenses, the better the bottom line. This balance between revenue and expenses keeps a business sustainable and financially healthy. Read on to know more about performing an expense analysis of your business.
A business has money coming in and cash going out. While many people in different capacities often track the incoming money, the expenses may not be watched as carefully. Unmonitored expenses can soon become a problem and counter the hard work that the company has put in to generate revenues. Expense analysis is the careful perusal of the company’s expenses for a period. Paying attention to the company's expenses is key to keeping its finances healthy. For best results, expense analysis should be performed monthly or at least every quarter. Systematic analysis of expenses helps the company identify unnecessary expenses before they become large enough to pose a serious problem. Expense analysis also helps spot expense trends and enables the company to plan its finances better.
There are many different types of expenses that a company can track. They can be broadly categorized as follows:
Each of these expenses should be analyzed for its necessity. An expense that is made to generate a bigger revenue in the future may be worth it. But other expenses that can be curtailed are identified, and cost control measures are taken.
One must be aware of non-cash expenses such as depreciation and amortization that do not create an actual outflow of cash. They are meant to expense the use of assets and their fall in value and or not expenses that need to be curtailed. The tax component of expenses is also usually as per the government calculations and is not restricted. They are calculated to understand the complete expense profile of the company.
The expenses of a company can also be categorized as fixed or variable. They are as follows:
Write down your revenue and sales: List the numbers for the revenue and sales for the time period being analyzed. This could be a week, month, quarter, or year. Manually performing this task may be tedious. TallyPrime lists this information instantly and makes the entire process of expense analysis easier to perform regularly.
Write down all of your expenses: Either use TallyPrime to list the expenses or manually list all the expenses for the given time period and categorize them properly.
Calculating your gross margin: Compute the gross margin by deducting the cost of goods sold (COGS) from the revenue. The COGS is the expense that is directly related to the production of the goods and does not include the administrative or labor costs. IT is the profit the company makes on the sales.
Calculate your profit margin: List and total all the expenses and subtract them from the revenue to calculate the profit margin. If it is negative, you will need to monitor your finances closely and take steps to improve your business. However, a negative number is not uncommon in a newer business.
What can you do better?
Analysis happens when you study the numbers and identify where your business is spending too much. The cost of goods sold is usually an expense that cannot be controlled. However, the rest of the expenses must be managed for the best results. Of these, the fixed expenses have the most significant impact when reduced. For example, moving to smaller premises may lower the rent and make a big difference to the company’s expenses and performance.
Expense analysis manually is a long and involved task. The amount of listing and calculation that is performed may not be practical to perform regularly. Accounting software such as TallyPrime extracts all the numbers that you need from your financial records instantly. It helps managers and business owners closely monitor their expenses and keep their businesses on track for financial success. TallyPrime provides you with analysis reports and graphs that take the hard work out of analysis of expenses. It is an invaluable tool to help you monitor expenses and course-correct them when the expenses are too high.
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