Properly tracking your business’ expenses is not only essential for staying profitable but can also be helpful is predicting trends.
Knowing which information to do further analysis on and what questions to ask are important, according to Joe Worth, who covered the topic in a recent Entrepreneur magazine article.
“If you have a CFO, he or she should already be doing this analysis for you,” Worth wrote. “And a really good controller 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.”
Whether you’re doing the analysis yourself or want to have a better understanding of what your CFO or controller should be doing, Worth shared these four steps.
Analyze the income statement. “For every line item in the operating expenses, calculate the dollar amounts and percentages of revenue,” he wrote. “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.”
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,” Worth wrote. “This will automatically get you thinking of the drivers behind each expense.”
Use a dashboard. “Boil down your actuals to the absolutely most significant numbers and trends (profits, expenses, revenue, cash flow, etc.) and compile them into an easy-to-read dashboard,” he wrote. “This will allow you and the management team to instantly spot trends and problems on a weekly-or even daily-basis.”
Make industry comparisons. “Reliable and relevant industry numbers can be hard for a single business owner to come by without spending a good chunk of money, but they’re critical to running a smart business,” Worth wrote. “[T]ry industry trade associations for any data, such as expense ratios, and ask other local businesses that are roughly the same size as yours-not competitors–to share their expense data. You’ll get a good idea of the costs for rents, salaries and other services in your geographic location.”
To read the complete Entrepreneur magazine article, click here.