January 31, 2013

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Editors Note: Chris Call, a partner with B2B CFO, summarizes best strategies for analyzing business expenses and the “why” behind the numbers. 

During the early-stages of business many small business owners will ask one common question, “What are the best strategies for analyzing expenses in my business?”

While analyzing business expense trends is vitally important, I have to first ask if you are the most qualified person to do this task?

If you have a CFO, he or she should already be doing this analysis for you. And a really good controller [or accountant] will be proactive about doing this kind of work. Bear in mind, however, that it’s beyond the skills and experience of most bookkeepers.

That said, I understand the entrepreneurial drive to try to find the answers. So if you’re going to go it alone, or you just want to understand what your CFO or controller should be doing, here’s a step-by-step plan.

1. Analyze your income statement

For every line item in the operating expenses, calculate the dollar amounts and percentages of revenue. Accounting reporting software (such as QuickBooks) should be able to spit out reports like this very easily. Compare the numbers to last month, the last three months, the average of the last three months (called “rolling average”), average year-to-date and the same month last year.

Next, examine the “why” behind the numbers. I had a client whose parking-ticket fines for his delivery trucks jumped significantly compared to the last quarter and last year, and it was killing revenue. Turns out the city had tightened its enforcement. We shifted the delivery schedules and hired a ticket-fighting service that more than paid for itself.

2. Compare “actuals” to budgets

One of the most important financial management exercises is the creation and use of a budget – the examination of all your expenses and estimation of what they will be next year. This will automatically get you thinking of the drivers behind each expense. And don’t worry, your estimates will nearly always be off-target, but if you understand why a line item is going considerably over budget, you’ll know what to fix and how.

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