Managing expenses sounds simple. Spend less than you earn. But anyone who has actually run a business knows it is far more nuanced than that. You have fixed costs that do not care about your revenue. You have variable costs that spike at the worst times. You have investments that cost money now but should generate returns later.
Here is how to think about expenses in a way that actually drives better decisions.
Categorize by Impact, Not by Type
Most business owners categorize expenses by what they are. Rent. Payroll. Marketing. Supplies. That is useful for accounting but not particularly useful for decision-making.
Instead, categorize by impact. Revenue-generating expenses are things that directly drive income. Your sales team, your marketing, your delivery fleet. Revenue-enabling expenses are things you need to operate but do not directly generate revenue. Rent, insurance, accounting. Then there are non-essential expenses. Things that are nice to have but the business survives without them.
When you need to cut, start from the bottom and work up. Never cut revenue-generating expenses to preserve non-essential ones.
The 10% Test
Every quarter, ask this question about every recurring expense. If we eliminated this entirely, would revenue drop by more than 10%? If the answer is no, the expense is a candidate for reduction or elimination.
This is not about being cheap. It is about being intentional. Many businesses carry expenses that made sense when they were adopted but no longer serve a clear purpose.
Negotiate Everything
Most business owners negotiate when they are first buying something and then never again. But your leverage as an existing customer is significant. Your landlord does not want to find a new tenant. Your software vendor does not want to lose a subscription. Your vendor does not want to lose a reliable buyer.
Every annual renewal is a negotiation opportunity. You do not have to be aggressive about it. A simple call saying I want to continue our relationship but I need the pricing to work for my current budget opens the conversation.
Build Expense Buffers
Budget for expenses to be 10-15% higher than you expect. Not because you plan to spend more, but because unexpected costs always arise. Equipment breaks. Insurance premiums increase. A key vendor raises prices.
If you budget to the penny, every surprise becomes a crisis. If you build in a buffer, surprises become manageable adjustments.
Review Monthly, Decide Quarterly
Look at your expenses every month so nothing surprises you. But make structural decisions quarterly. Monthly reviews catch anomalies. Quarterly reviews reveal trends. You need both.
Avoid the trap of making knee-jerk decisions based on a single month's numbers. One bad month is a data point. Three bad months is a trend that requires action.