Chapter 3: Expenses—The Unsung Characters in Your Business Story

Introduction: Expenses, Unpacked

Welcome back to our journey through the chapters of your business’s financial story. In the last chapter, we explored revenue—the headline number that gets everyone’s attention. Today, we’re turning the spotlight on a less glamorous but equally important part of your narrative: expenses.

If revenue is the “what comes in,” expenses are the “what goes out.” They’re the costs of making your vision real—everything from the raw materials or inventory you buy, to the salaries you pay, to the subscriptions that keep your systems running. Expenses don’t just happen in the background; they’re active characters that shape your business’s plot, influencing everything from profitability to cash flow and even your peace of mind.

Understanding your expenses isn’t about penny-pinching or cutting costs for the sake of it. It’s about clarity—knowing where your money is going, why, and whether it’s truly serving your goals. When you view expenses through the lens of storytelling, you can see which ones are supporting your business’s growth, which are holding you back, and where you have opportunities to write a better next chapter.

 

laptop on white desk with purple financial charts and graphs on the screen and purple plant in the background with papers to the right

What Are Business Expenses? (And Why Do They Matter?)

At their core, expenses are the costs your business incurs to operate and deliver value. Some are obvious and predictable, like payroll or rent. Others are more variable, like marketing campaigns or travel. And some, like software subscriptions or professional services, can sneak up on you if you’re not paying attention.

Why expenses matter:

  • They impact your profitability. Every dollar spent is a dollar that doesn’t flow to your bottom line.
  • They affect your cash flow. Even profitable businesses can run into trouble if expenses outpace cash coming in.
  • They tell you what you value. Where you spend reflects your priorities—whether that’s investing in people, technology, marketing, or something else.

The goal isn’t to eliminate expenses, but to align them with your vision and strategy. Smart spending fuels growth, innovation, and sustainability.

Types of Expenses: Breaking Down the Cast

Let’s break expenses into categories so you can better understand their roles in your story:

  1. Cost of Goods Sold (COGS)

These are direct costs tied to producing your product or delivering your service. For a retailer, it’s inventory. For a consultant, it might be subcontractor fees.

 

  1. Operating Expenses (OPEX)

These are the day-to-day costs of running your business, not directly linked to a specific sale. Examples include:

  • Salaries and wages
  • Rent or office expenses
  • Utilities
  • Marketing and advertising
  • Insurance
  • Software subscriptions
  • Professional services (accounting, legal, etc.)

 

  1. One-Time or Capital Expenses

Occasional big-ticket purchases, such as equipment, vehicles, or major software implementations.

 

  1. Variable vs. Fixed Expenses
  • Fixed: Stay the same each month (e.g., rent, salaries).
  • Variable: Fluctuate with your activity (e.g., raw materials, shipping, commissions).

 

Action Step:
Review your last three months of expenses. List them by category. Which are fixed? Which are variable? This breakdown often reveals patterns—and opportunities for improvement.

Expense Patterns: What to Watch For

Just as with revenue, your expenses tell a story over time. Look for these patterns:

Seasonality

  • Do certain expenses spike at parti
  • cular times of year? (Think: holiday inventory, annual software renewals, tax season.)
  • Are there months where cash is especially tight due to predictable costs?

Growth or Creep

  • Are expenses rising faster than revenue?
  • Have you added new subscriptions, vendors, or team members recently? Is each still necessary?

Unexpected Surges

  • Were there any surprise bills or emergencies?
  • Did you incur costs that didn’t deliver value (e.g., an underperforming ad campaign)?

Recurring Small Expenses

  • Are there small, recurring charges that add up over time? (Many businesses are surprised by how much they spend on software, apps, or miscellaneous fees.)

By tracking these patterns, you can plan proactively, avoid surprises, and make smarter decisions about where to invest or cut back.

Expense Analysis: Turning Data Into Insight

Understanding your expenses isn’t just about tracking what you spend—it’s about analyzing why and how that spending supports your business.

  1. Calculate Expense Ratios
  • Expense-to-revenue ratio: What percentage of your revenue goes to each expense category? Are these ratios in line with your industry or business model?
  • Profit margin: After expenses, how much do you keep? (We’ll dive deeper into margins in a future issue.)
  1. Compare to Budget or Forecast
  • Are you spending more or less than planned? Why?
  • Is overspending delivering results, or is it a red flag?
  1. Benchmark Against Peers
  • If possible, compare your expense structure to similar businesses. Are you spending more on marketing, payroll, or overhead than your peers?
  1. Assess ROI (Return on Investment)
  • Which expenses directly drive revenue or efficiency?
  • Are there areas where you’re spending out of habit rather than strategy?

Real-World Example: Expense Story in Action

Let’s say you run a manufacturing company. Over the past year, your sales have grown steadily, and you’ve invested in new equipment to boost production. However, when you review your expenses, you notice that your utility bills and maintenance costs have increased much more than you expected.

Digging deeper, you discover that the new equipment, while more efficient in output, has higher energy requirements and requires more frequent servicing than your older machines. You also realize your supplier contracts for raw materials haven’t been renegotiated in over two years, and prices have crept up.

By analyzing your expense patterns, you identify two opportunities:

  • First, you schedule a meeting with your utility provider to discuss energy-saving programs and consider investing in energy-efficient equipment for your facility.
  • Second, you reach out to your suppliers to renegotiate bulk pricing and explore alternative vendors.

These actions help you control rising costs, improve your margins, and ensure your investments are truly supporting your growth—turning what could have been a silent drain on profitability into a proactive strategy for sustainability.

Expense Controls: Building Healthy Habits

Managing expenses isn’t about cutting for the sake of cutting. It’s about building sustainable habits that keep your business healthy and agile.

  1. Regular Reviews

Schedule monthly or quarterly expense reviews. Look for:

  • New charges or vendors
  • Increases in recurring costs
  • Expenses that no longer align with your goals

 

  1. Approval Processes

For larger businesses, set clear guidelines for who can approve new expenses or contracts.

 

  1. Vendor Negotiation

Don’t be afraid to negotiate with vendors or seek alternatives. Loyalty is great, but so is a better deal.

 

  1. Eliminate “Zombie” Expenses

Cancel subscriptions or services you no longer use. Even small amounts add up over time.

 

  1. Automate Where Possible

Use accounting software to flag unusual charges, track spending by category, and set alerts for budget overruns.

 

  1. Align Spending with Strategy

Before approving a new expense, ask:

  • Does this directly support our goals?
  • Will it save time, improve quality, or drive growth?
  • Is there a less expensive way to achieve the same result?

Common Expense Pitfalls (and How to Avoid Them)

  • Shiny Object Syndrome: It’s easy to get excited about new tools, courses, or marketing tactics. Make sure each new expense has a clear purpose and measurable ROI.
  • Neglecting Small Expenses: Don’t overlook small, recurring costs. They can quietly sap your profitability.
  • Underestimating Growth Costs: Rapid growth often brings new expenses—more staff, bigger space, upgraded systems. Plan for these so they don’t catch you off guard.
  • Failing to Review Contracts: Many services auto-renew at higher rates. Regularly review and renegotiate.

Practical Challenge: Audit Your Expenses

Set aside 60 minutes this week to conduct a mini expense audit. Here’s how:

  1. Gather your last three months of expense reports or bank statements.
  2. List every recurring expense and categorize each (COGS, operating, one-time, fixed, variable).
  3. For each expense, ask:
    • Is this essential to delivering value to my customers?
    • Does it align with my current goals?
    • Could I get the same result for less?
    • When was the last time I reviewed or negotiated this expense?
  4. Highlight any expenses that surprise you, feel bloated, or no longer serve your business.
  5. Decide on one action you’ll take this month—whether that’s canceling a subscription, renegotiating a contract, or setting a new budget for a category.

Write down your findings and your next step. This simple exercise can free up cash, improve your margins, and help you feel more in control of your business story.

Wrapping Up: Expenses as Strategic Choices

Expenses aren’t just numbers to minimize—they’re strategic choices that reflect your business’s values and direction. When you understand and manage your expenses with intention, you create space for growth, innovation, and peace of mind.

Remember, the goal isn’t to cut everything to the bone, but to spend wisely, invest in what matters, and let go of what no longer serves you. Your expense story is one you get to write—and rewrite—as your business evolves.

Need Support? Let’s Talk

If you have questions about managing expenses, want a second set of eyes on your spending, or need help building a smarter expense strategy, I’m here.

Email me anytime at info@theoutlierpartners.com.

Let’s make your expenses work for you, not against you.

Next Up:

Next week,  we’ll explore margins—what they are, why they matter, and how to improve them for a stronger, more sustainable business.