Have you have ever looked at your bank balance or credit card statement and wondered “where on earth does all the money go”? Your money will go anywhere and everywhere if it’s not TOLD where to go….but this isn’t about budgets, that’s a topic for a later date. Today, we’re talking about transparency. You deserve to know exactly where every dollar goes. You can’t tell your money where to go if you don’t know where it’s already going. You need this information, these numbers, to decide if the expenses are important or can be reduced.
What is an Expense Audit?
An Expense Audit also known as a Spending Audit is a review of the money you spend in the business (expenses). I used to be an auditor. I know what the word “audit” triggers in people. Your mind instantly imagines an IRS audit or that external auditor trying to “catch you” in a mistake. I promise, that’s not what this is. In fact, my goal is for you to understand this is 100% the opposite of that image in your mind. In my previous career/company, I made it my personal mission to change the image of auditors and I am determined to do the same for all of you. A good audit, one with the Company and its people in mind, is designed to ADD VALUE. Audits do this by identifying areas for improvement and recommending efficient and effective solutions. An expense audit identifies areas where business expenses could be eliminated, reduced, or re-prioritized.
Why Should You Care About an Expense Audit?
Remember when we talked about cash flow management last week? Well, there are two ways to increase your cash flow aka the money in your business.
- Increase Sales
- Decrease Expenses.
An expense audit is the FIRST thing I do with new clients after setting the foundation and completing the profitability assessment. I know hiring a virtual CFO is an expensive endeavor and I want you to see that value returned in your business ASAP! I also know most of you are going to realize you are spending way more than recommended during that profitability assessment. So let’s get those costs down and profits up!
When focusing on getting more sales or cutting costs, I’m always going to recommend you LOOK at costs first. Notice I didn’t say I’m always going to recommend cutting costs first. There is a time and place for everything. Don’t go cut Johnny’s paycheck…that is not the answer. Buuuuuut analyzing and increasing your sales takes time. You’re here to save time and make more money right?!?! The quickest way to do that is identify where the money goes and if it needs to continue going there. Everyone has frivolous spending. You just have to find it.
Make the Money Work For You
Yep, I’m saying it again. You have to know your numbers in order to make the money grow! An expense audit allows you to see where the money is really going and decide if it’s worth it. When you look at each expense through the lens of “profit maximization” you might think twice about that personalized (though bright, brilliant, and beautiful) notebook. What about that business book of the month club….that you’re 3 books behind on?
Ready to Revamp the Runway
Even if you choose not to modify a single cost right now, an expense audit gives you the knowledge and power to make those changes if and when you need to. You would be surprised how frugal you can get if you have to scale back. But only if you know what the expenses are and how they’re used.
You need to know your numbers so you can maintain control over your destiny.
When the unplanned or unthinkable happens, you get to quickly decide what really belongs in your cash runway calculation. If you aren’t sure what I’m talking about, check-out the free accounting terminology cheat sheet or cash flow management blog post. Trust me, you want that runway to be as long as possible.
How Do You Find These Cost Savings with an Expense Audit?
There are definitely varying degrees of detail you can use in an expense audit. I will briefly touch on the more detailed steps which reflect contract compliance audits but want you to understand this step is often outsourced to a company or contractor that specializes in these areas. For the most part, we are going to keep it simple and get the most bang for the buck with as little time taken as possible.
Step 1 – Gather the Data
I know, I’m always telling you to get your numbers or data. That’s where the MAGIC is happening whether accidental or intentional! For this process, you want at least three months of the following:
- Bank statements and/or credit card statements
- Cash payment application detail (PayPal, Venmo, etc.)
- Bookkeeping/Accounting reports showing expense transaction detail
Remember, we are focusing on the money you have SPENT. The cash going out of the business. You don’t need to worry about the cash coming in. If you’ve recently pieced your financials together for your tax filing or already have impeccable books, you can probably just look at that…but I’m going to assume we’re all starting this together from scratch.
The results of this audit are only as good as the data being reviewed to get them.
Step 2 – Find the Patterns
You are looking for recurring costs here. Yes, you may have a “luxury” expense that isn’t recurring but at this point, it’s done. You probably can’t refund or return it. Analyzing that expense is not going to help you significantly change your spending patterns going forward. When you find an expense that occurs multiple times, keep track of the following details in a spreadsheet:
- Vendor – Who are you paying?
- Item/Service – What are you paying them for?
- Frequency – When does the expense come out? How often?
- Purpose – How does the service or product help your business?
How does it feel to see all of this in one place? What did you find that you didn’t even remember you were paying for? Those automatic payments can come back to haunt you!
Step 3- Categorize the Costs
I want you to visualize your business goals right now. Are you determined to have more profit this year than last year? Are you trying to break through the six figure mark? What does reaching that goal bring to your life?
Now that you’ve got a clear picture in mind, let’s look at those recurring expenses. In your spreadsheet, I want you to categorize each expense as:
- Essential – You need this item to continue running and growing your business. We are talking about the basic necessities here. These costs might include website hosting, internet, electricity (you have to keep the lights on!), etc.
- Non-Essential – You probably love these products or services but your business could run without them. These costs might include music subscriptions, amazon purchases for new colorful office supplies, lunch meetings at your favorite restaurant, membership fees for business organizations, etc.
- Not Needed – You could easily live without this product or service. You probably signed up for it, stuck it on autopay and forgot it was even there. These costs are literally just draining your bank account with little to no added value to your business. These costs often include things like a business magazine subscription you bought from your nephews fundraiser, etc.
Step 4 – Take Action
Go back to that goal we visualized, what are you willing to live without to get there? Go back through to your spreadsheet and pick one action you can take on each one. Here’s your freebie….you can cancel all “not needed” expenses today. Are you stuck on the necessary expenses? Can you research alternatives? Negotiate lower rates? Change vendors? Here are some examples of actions you can take:
- Cancel the expense – if it’s completely unnecessary, stop paying for it.
- Take a time-out – can you just try to go without the expense for a few months and then see if you even miss it?
- Research alternatives– think about cell phone bills or internet providers. We often have more options than we realize for vendors, plans, etc.
- Get outside the box – is there another way to accomplish the goal of this product or service without replacing the expense? Maybe there is something you already have/use that could accomplish the purpose?
There’s a balance here. Time vs Money. You may not need to take action on every item to make a significant impact in your business finances. If taking action on a specific step takes more time/value from your business than it adds, you can table that action for a rainy day. It’s still important to decide what action you can take. Unplanned events are inevitable and this process will help you decide exactly what and where you can cut costs in that scenario. Now go take some action!
Optional Step 5 – Compliance
This is the step that gets into some compliance work but can be very fruitful if you have the time or desire to do it. Filter your spreadsheet to show the recurring payments to a specific vendor. If they’re all the same every month, like your internet bill, you don’t need to go any further. But if you have a vendor that has fluctuating payments because you buy slightly different products/services each month (maybe a contractor or a parts provider) you can compare the agreed upon pricing (often in your contract with them) to the invoices and price you are actually paying. You may also want to confirm the quantity (hours, number of items, etc) agrees with what you ordered and received.
Your vendors are human and capable of making mistakes. Sometimes pricing gets mixed up between customers or they accidentally type the wrong number on the invoice. What you are looking for here is something we call a three-way match in accounting. The product or service was ordered, received, and paid for at the same quantity and price in all three steps. This process is also great for catching any duplicate payments you might have made to someone. If you know the vendor is always being paid for different products/services every month, investigate the ones that match. Are they actually for different products/services or did you pay for the same thing twice?
Again, there are definitely companies that can help you with these steps in more detail and they often have software programs to assist them in the analysis. However, depending on your size, you may want to take a stab at this yourself or with the help of your virtual CFO.
Get to Work
Now you know what an expense audit is, and how to do one….get to it! There is no excuse NOT to find the “extra” money in your business. I want to hear all about how much money you saved. Not interested in the DIY approach? I’m your girl! Let’s start saving you some $$$ today!
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