Business isn’t cheap. There’s a lot of emphasis in the business world on building and growing revenue so we can make the price tag it takes to keep the lights running worthwhile. But something we hear very little about? Habitual spending. 

As business owners, you’re probably well aware that revenue – expense = profit, but it seems like there isn’t much talk about growing your profit by reducing your expenses. Our spending habits have the potential to decrease our revenue if we aren’t spending appropriately.

Expenses won’t look the same for every business, but the principle is the same — if you’re spending too much money on things that aren’t bringing more money back into your business, you could be losing profit. 

This exercise will help you better understand the “why” behind your business spending and provide some structure for identifying opportunities for improvement.

Let’s dig in!

Get to the numbers

First things first: Let’s pull the numbers. You’ll want to know your total income, profit, and expenses. The best place to find this list would be to download a recent YTD (year-to-date) purchase & loss (P&L) report from your bookkeeping software. You can typically access them on your accounting software, which should be able to pull up a report, or by following this formula if you need to calculate it yourself. 

Once you’ve exported that data into a .csv file, you can sort by type of revenue (the offers, products, or packages you earned money through) and expenses (payroll, software, contractors, shipping, etc.).

Tracking these numbers can help you see very clearly what your profit is (money left over after expenses, taxes, etc.), and how much you’ve spent. This is usually illuminating for folks who only ever look at invoices paid. That’s not an accurate depiction of your business finances!

Evaluate your top expense categories

When you pull your statements, add up all your expenses for the year. (You can also look at this in your bookkeeping tool by selecting “Expenses” and changing the date range for the first of the year through today.) What did you find? Where are you spending the most money?

There shouldn’t be any judgment or blame for what you find here. Everyone has different financial needs. This post isn’t to tell you one expense is better or worse than the other, but instead, to help you identify areas of spending that are proving to be an issue with your overall budget.

That’s why getting to the nitty-gritty and working through your expenses is so important for figuring out what you actually need in your business. Discovering the purpose behind how you spend and the purpose behind the expenses can help you figure this out. 

Consider the “why” of your expenses

When you sit down to assess your budget, especially your top expenses, don’t just balk at the total. I know this is easier said than done if you’ve had more expenses than expected, or you operate in a lower-margin industry, like product sales. However, hear me out.

Instead of reacting and trying to cut expenses, ask yourself, “Why is this one of my largest expenses?” or “Why is this expense necessary?” From there, you can keep asking why — like a toddler — until you find the root cause of your spending needs.

For example, if shipping is one of your biggest expenses, this is how the analysis could look:

• Why is this one of my largest expenses? Every order requires shipping. 
• Why? Customers aren’t willing to pay for shipping. 
• Why? It’s easiest to ship through the courier that is closest to me and use whichever packing I have available at that moment to use. 
• Anything else? I haven’t looked into the difference between USPS, UPS, and FedEx to send my products. 

And there you have it. Digging further until you have an answer is how you figure out the characteristics of your spending habits, whether they’re positive or not. There’s a lot to take away from this breakdown, including that this hypothetical person really needs to look into alternative shipping solutions. No judgment, just clear steps to take to address higher-than-expected spending.

Determine if adjustments are needed

After breaking down your biggest expenses, you may need to make some adjustments to reduce your spending. Remember that the most important thing is to address the root cause of the spending, not the end result. 

From the example I used above, this could mean exploring a less expensive method of shipping, like pre-printing labels instead of going directly to the post office. 

Questions to ask yourself to figure out what adjustments you may need to make:

• Is this an immediate opportunity for adjustment?
• Is this something that can wait a bit longer and be handled within the next one to two months? 
• Is it an expense that isn’t urgent and can be taken care of in the next three to six months? 

Knowing what takes priority is also key for wrangling your spending. You’d be surprised how often we think an expense is urgent, but once you sit down and analyze your budget, you realize it can wait. 

After you’ve done this once, repeat the process again in six months. Compare your worksheets to see if your spending habits are still sustainable for your business, especially after changes have been made. 

Repeat your expense review every six months — make it a process!

If you aren’t keeping track of your spending, you may be losing more money than you think (or leaving more money on the table). We all know that we need strong operations and project management for our businesses to run smoothly, but the same can be said of our finances.

That’s why I recommend doing this expense report evaluation and “Why” exercise every 4-6 months. Things can change quickly in our business, and expenses can mount faster than we expect. By doing this at least twice a year, you keep a pulse on where your money is going and why you’re spending it.

Of course, you don’t have to reinvent the wheel every time you want to look at your finances.

Standard operating procedures (SOPs) can help you manage the ways you spend money — and evaluate your profit and loss. SOPs can be used over and over, so you never miss a step when it comes to getting your money in order. 

If you want an SOP template that includes everything you need to set up a recurring finances review, I’ve got one!

My SOP template includes a procedure documentation example and various file types for however you want to document your processes!