What is Expense Analysis & How to Analyze Business Account

What is Expense Analysis & How to Analyze Business Account
|Updated on: June 27, 2022

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.

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What is expense analysis?

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.

How to analyze a business account

  1. Generate the company's income statement. While manually computing it may be difficult, software such as TallyPrime lets you generate reports with all the information you need to analyze In case you are doing the exercise manually, list the revenues and assets for the time period. The revenue may be categorized by product to visualize the percentage that each product has contributed to the total revenue.
  2. The COGS (Cost Of Goods Sold) is calculated for each of the products that are sold. This cost includes all the raw materials and labor involved in the production of the product. These expenses may also be categorized to visualize the percentage of expenses that each product has incurred.
  3. The gross margin is calculated as the difference between the COGS and the revenue.
  4. The changes in the gross margin over the last few periods must be monitored to determine if there have been changes. If there have been changes, the factors that have caused the changes are identified. If the expenses have increased, the gross margin will shrink.
  5. The additional costs that are involved, such as advertising and marketing, are also added and converted into a percentage with respect to the sales. This is also compared to the past time periods.
  6. Calculate the general office expenses and administrative costs. These costs do not include depreciation, amortization, or interest.
  7. All the expenses calculated are deducted from the revenue to calculate the gross profit or income. This is analyzed compared to the sales for the last few time periods. IF there has been an increase, it is a sign that the business is improving.
  8. If any assets have been sold at a gain or loss, this is also used to adjust the gross income. The resulting net income is expressed as a percentage of revenue.
  9. The non-cash expenses are added again to find the exact cash position of the business. This shows if the business has made a profit or a loss.
  10. The variance of this amount is calculated for the previous time periods, and the reason for any changes is analyzed. The identified reasons must be managed to produce the best results for the company.

Types of expenses to track

There are many different types of expenses that a company can track. They can be broadly categorized as follows:

  • Operating expenses: These are the expenses directly related to the production of the products that the company selfless or for the company's core operation. They are the cost of raw materials, transportation, and other costs that are directly related to the production and manufacturing process in the company. The costs other than these costs can be called the non-operating costs. It is usually the non-operating expenses that are first trimmed during an analysis of expenses.
  • Administrative expenses: The company has to pay for rent, travel, and other expenses such as insurance. These are usually recurring costs that are necessary for the company to sustain operations.
  • One-time expenses: Some costs that the company incurs are not recurrent and may be paid only once. This may be a membership fee, license fee, or similar expenses.
  • Marketing expenses: Marketing and advertising are essential for the company to increase its sales, and the money spent on promotional expenses falls in this category.

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:

  • Fixed costs: A company's fixed costs do not vary with changes in production. For example, the company’s rent stays the same regardless of how many goods it produces. The lower the fixed costs of the company, the better. Fixed costs can impact the company’s profit margin more severely as they do not change when the company faces a period of low production. When production is high, the cost stays the same, and this is favorable. This is called leverage. The better the company’s infrastructure and technology use, the lower the fixed costs are.
  • Variable costs: The variable costs of a company change depending on the volume of operations. Storage, transportation, and similar costs rise when there is more production. The variable costs do not severely impact the profit margin as they are proportional to the sales generated.

How to analyze your business expenses step-by-step

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.

Software for business analysis

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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