Expense analysis

Analyzing your expenses will be the tool you use to see where you're spending money. This is done through a review of the figures on the month-end income statement. As mentioned before, the income statement is the list of the revenues and expenses of your business. This is prepared monthly, often with a comparison to the budget figures you developed so far.

All of the income categories are totaled and represented as 100%. From here, expenses are calculated as a percentage of total income. Naturally, there will be certain expenses that are significantly large in comparison to other expenses. This will be identifiable in dollar figures and by percentage of total income. Watching the percentage will help you to see peaks and valleys if the item has regular fluctuations. An example would be labor. In construction, labor will be high during the summer, building up during the spring and then falling until winter. This would compare to high labor costs during the Christmas season and lower labor costs during the remainder of the winter for a retail store. If your labor is consistently steady, you will expect similar dollar amounts and percentages throughout the year. If this changes, you should catch it as a problem and identify what caused the change and then make any necessary corrections.

Over the course of time, you will prepare your budget according to expected highs and lows in all areas and be able to aim for specific income, expense and profit levels each month and as a cumulative figure at the end of the year. As years pass, you will see recurring percentages for expenses and be able to know if there is a problem or weakness in a particular. This will trigger corrective actions as variances arise.

In the end, you should have set up your budget to anticipate all the highs and lows you can and expect to have profits at a certain level. There should be a percentage target for your profit. As you control this, you will be continuously searching for ways to reduce total expenses and increase profit - the goal of any business.