What is expense analysis? A hidden goldmine that impacts your bottom line

Income and expense analysis involves reviewing your financial statements—the income statement, expense reports, and other financial data—to track where your money goes. The goal is to understand your actual expenses, identify inefficiencies, and find ways to reduce variable costs without compromising.

By analyzing your company’s expenses, you can identify areas where you’re overspending or not getting a return on investment. This process is essential for financial planning, as it helps you align your expenses with your business goals and ensures profitability.

What is expense analysis?

Expense analysis is the process of reviewing and evaluating your business expenses to make better decisions and improve financial performance. It helps you understand spending patterns, track operating expenses, and spot cost-saving opportunities. Whether you're a small business or a startup, conducting regular expense analysis allows you to reduce overspending and optimize cash flow.

Key benefits of expense analysis:

• Control costs: Identify where you can reduce unnecessary spending
• Improve profitability: Analyze profit margins and gross profit to focus on profitable areas
• Automate tracking: Automate expense tracking and gain real-time insights into your spending

Types of expenses to track

Tracking the right expense categories is crucial for effective business expense analysis. Here are the most common types of expenses you should focus on:

By categorizing your business expenses accurately, you can pinpoint specific areas to optimize. For example, an expense analysis example can highlight where marketing costs or labor expenses are rising disproportionately. Properly tracking travel expenses or marketing expenses allows you to focus on areas that impact profitability most.

How to analyze your business expenses step-by-step

Performing a line-by-line expense analysis involves systematically reviewing each individual expense item to understand its nature, purpose, and impact on overall financial performance. This allows you to identify opportunities for cost-saving, optimize your expense categories, and make more informed decisions about where to allocate your resources.

Here's how to perform a thorough income and expense analysis:

1. Product/service level COGS analysis

The first step is to break down cost of goods sold (COGS) by each product or service category. COGS includes all direct costs associated with producing your goods or services:

• Calculate the percentage of total revenue represented by COGS for each product
• Identify products or services with high or increasing COGS as a percentage of revenue
• Benchmark the percentages with industry averages to gauge how your products compare to others in the market
• If your COGS percentages are higher than the industry average, explore options to cut business expenses through vendor negotiations, considering alternative suppliers, and eliminating waste

2. Gross margin analysis

This helps identify how efficiently you’re producing and selling your products or services:

• Calculate the gross margin for the overall business and individual product lines using the formula: Gross Margin = (Revenue - Cost of Goods Sold) / Revenue * 100
• Analyze gross margin trends over time. Is it improving or deteriorating?
• If your gross margin is deteriorating, investigate the root causes and explore strategic decisions, such as discontinuing low-margin products
• Assess how changes in production costs, materials, or supplier relationships affect gross margin

3. Inventory management

Managing inventory effectively helps reduce COGS so you're not holding unnecessary stock:

• Analyze inventory turnover rates and carrying costs
• Assess whether excess inventory or stockouts are impacting COGS
• Reduce inventory holding periods and optimize inventory levels to reduce carrying costs
• Calculate days inventory outstanding (DIO) to measure the average number of days it takes to sell inventory. A lower DIO indicates better inventory efficiency.

4. Production efficiency

Evaluating production processes and efficiencies can highlight areas where costs can be reduced without affecting the quality of your products or services:

• Identify bottlenecks in your production process and reduce operational costs
• Monitor production waste and scrap rates, and aim to reduce them
• Adopt lean manufacturing principles to eliminate waste and improve efficiency
• Implement robust quality control processes to minimize defects and rework. Address the root causes of defects to avoid recurring issues.

5. Fixed vs. variable expenses

Understanding the behavior of fixed and variable business expenses is key to making cost-effective decisions, especially as your revenue changes:

• Conduct a break-even analysis to determine the production level at which total revenue equals total costs
• Identify the contribution margin—selling price minus variable cost per unit—to assess profitability
• Perform sensitivity analysis to see how production level changes affect fixed and variable costs
• Assess the flexibility of fixed expenses and explore opportunities for cost reduction once a line-by-line analysis of other operating expenses (OPEX) is completed

6. Employee productivity

Tracking employee productivity helps you assess whether labor costs are aligned with the value they’re generating for the company.

• Evaluate metrics such as revenue per employee or sales per employee to assess labor efficiency
• Benchmark results against industry best practices to evaluate productivity and performance
• Track key performance indicators (KPIs) such as output per hour, sales targets, and customer satisfaction scores
• Explore outsourcing options to reduce costs and increase operational efficiency

7. Expense category breakdown

Breaking down Operating Expenses (OPEX) into various business expense categories allows you to identify areas where costs are rising unnecessarily.

• Calculate the percentage of total revenue represented by each expense category, such as salaries, marketing, rent, and utilities
• Analyze variances between actual expenses and budgeted or historical expenses. Investigate reasons behind significant increases.
• Determine whether your expenses are in line with expectations; find where to optimize spending

8. Marketing and advertising ROI

Analyzing the effectiveness of your marketing spend is crucial for ensuring you’re getting a good return on investment (ROI).

• Calculate the ROI for each marketing campaign using the formula: ROI = (Net Profit / Cost of Campaign) * 100
• Adjust marketing strategies based on the cost-effectiveness of each campaign
• Clearly define the goals of your marketing and advertising campaigns—brand awareness, lead generation, or customer retention—and align them with KPIs

9. Lease and rental analysis

Lease agreements and rental contracts can significantly impact operating expenses. Regularly reviewing these contracts helps optimize costs:

• Review lease agreements and assess the cost of leased assets
• Conduct a cost-benefit analysis for each lease to evaluate its contribution to business operations
• Explore renegotiation options or consider alternative locations to reduce costs

10. Energy and utility efficiency

Energy costs can represent a large part of a business's expenses, but there are often opportunities to reduce them through efficiency measures:

• Evaluate energy consumption and identify opportunities for cost-reduction and energy-saving
• Implement sustainability practices and use energy-efficient technologies such as LED lights and motion sensors
• Conduct energy audits and invest in Energy Star-rated equipment to reduce long-term costs

11. Technology and IT expenses

Assessing the cost of technology infrastructure and IT services helps you make sure your technology investments are contributing to profitability:

• Evaluate the return on investment (ROI) for your technology and IT services
• Explore cost-effective alternatives such as cloud services instead of in-house server rooms
• Negotiate recurring IT services contracts for better rates or consider consolidating services

Automating your expense analysis

Automating your expense analysis is a game-changer for businesses looking to save time, improve accuracy, and gain real-time insights into their financial data. By utilizing accounting software and expense management tools, you can streamline the process of tracking company expenses, categorizing transactions, and generating expense reports.

Why automate?

• Increased accuracy: Automated systems reduce the risk of human error in recording and categorizing expenses
• Time savings: Automation eliminates the need for manual data entry and ensures that your reports are generated on time, freeing up your resources for more strategic tasks
• Real-time data: With automation, you can access real-time data on your expenses, allowing for quicker decision-making and the ability to address potential issues before they escalate
• Customization: You can customize many automated systems, such as Ramp, to fit your specific business needs, ensuring that you track only the most relevant expense categories

How does automation help?

• Automated tools can track and categorize expenses such as travel expenses, marketing costs, and variable expenses, providing a clear picture of where your money is going
• Integration with other platforms allows for seamless syncing of expense data, which helps you create accurate reports and financial statements without manual input

By automating your expense analysis report and tracking, you're not only ensuring greater efficiency but also improving your financial planning process. With accurate expense reports generated regularly, you'll be empowered to make better, data-driven financial decisions that align with your business goals.

Maximize your bottom line with Ramp's effortless expense management

Effective expense analysis is essential for optimizing your business's financial performance.

By gaining detailed insights into company expenses, identifying inefficiencies, and automating manual processes, you can improve decision-making and streamline operations. Ramp’s expense management platform simplifies this process by providing real-time visibility into all transactions, uncovering cost-saving opportunities, and automating many of the steps involved in tracking and categorizing expenses.

Ramp revolutionizes expense management with its automated solution, seamlessly integrating corporate cards, reimbursements, invoices, and more. Empower your team to take control of spending proactively while automating tedious tasks like receipt matching and budget approvals with Ramp.