When it comes to expense analysis, the instinctive move is to dive into the profit & loss (P&L) statement, searching for major cost contributors and identifying where corners can be cut.

However, expense analysis goes beyond targeting wasteful expenses and requires a broader assessment of overall spending efficiency:

• Out-of-policy expenses: Identify expenditures that fall outside established policies, exposing areas of non-compliance 
• Pending claims: Spot unprocessed or pending reimbursements, presenting financial commitments that need to be accounted for promptly
• Seasonal variability: Find seasonal expense patterns, such as higher utility costs in certain months or increased travel during particular periods, providing a more accurate basis for budgeting and trend analysis

This blog post outlines key ways to analyze expenses beyond immediate cost-cutting. By incorporating a full-spectrum view, you strengthen financial discipline and can better plan finances for the coming business quarter and year.  

How to Analyze Company Expenses?

For effective expense analysis, the first step is to collect and categorize expense data. 

Depending on your organization's needs, expenses can be categorized in various ways—by vendor, department, or cost center. For simplicity, we will begin by analyzing expenses based on different accounts, such as operational costs, travel, or overheads. 

Below are the key ways to analyze these accounts and turn these insights into actionable findings to optimize your spending.

1. Year-by-Year Comparison

Year-on-year analysis involves comparing business expenses to historical data from previous periods—quarterly, annually, or over several years. 

By evaluating how your expenses have changed, you can:

• Identify trends and patterns in spending
• Highlight periods of significant increase or decrease in costs
• Track the effectiveness of past cost-saving initiatives

So, if travel expenses are consistently higher during certain quarters, you could forecast future costs more accurately and take preemptive measures, like adjusting travel budgets for upcoming periods.

2. Trend Analysis

Trend analysis involves examining how expenses change over time. This helps identify spending patterns and outliers across periods (e.g., monthly or quarterly). 

By spotting trends, you predict future spending behavior and spot potential areas of concern early. It’s particularly useful for understanding seasonal or cyclical patterns, such as higher marketing costs during product launches or increased staffing needs in peak seasons.

For instance, if you discover that advertising expenses spike every quarter with product launches, you could consider more cost-effective marketing strategies, especially if the ROI from these efforts does not align with the increase in spending.

3. Variance Analysis

Variance analysis involves comparing actual expenses to budgeted expenses. This helps identify discrepancies—whether over-spending or under-spending—so you can take corrective actions promptly.

For example, if actual travel expenses exceed budgeted figures by 20%, investigate whether the overrun is due to unexpected travel needs or inefficiencies in booking processes. This will help refine your forecasting methods and implement stricter travel approval processes.

4. Identification of Cost Drivers

Cost driver analysis identifies the factors or activities that contribute most significantly to overall expenses within each category. By pinpointing the activities or factors responsible for most of your costs, you can make targeted changes. 

For instance, if certain departments or functions consistently drive up expenses, focus on improving efficiency or exploring alternative approaches to reduce costs.

So, if you discover that production costs are driven by raw material prices and labor inefficiencies, explore supplier negotiations and process improvements.

5. Financial Ratios

Financial ratios, such as the expense ratio, profit margins, and return on assets, provide insights into how efficiently a company manages its expenses and generates profits.

They provide benchmarks that allow companies to:

• Determine how well expenses are controlled relative to revenue
• Measure how much profit is retained after covering expenses
• Understand the effectiveness of investments and whether the capital spent is generating the expected returns

A higher-than-expected ratio signals overspending or inefficiencies, while a lower-than-expected ratio suggests missed opportunities for growth or cost savings.

So, for instance, if your expense ratio is 80%, higher than the industry standard of 60%, it indicates overspending and inefficiencies. Conversely, a ratio of 40% suggests underinvestment in key areas like marketing, potentially missing growth opportunities.

6. Industry Benchmark Comparisons

Industry benchmarks compare your expenses to industry peers or competitors. 

By understanding how your spending compares to similar organizations, you gauge whether your costs are in line with industry standards or if you are overspending. It also provides a basis for setting realistic targets and making data-driven decisions about cost management.

For instance, if your office supplies cost 25% more than the industry average, you’re either overpaying for these items or not optimizing purchasing practices. This comparison suggests finding more competitive suppliers or exploring bulk purchasing options.

Presenting Expense Analysis Findings

Spending hours on analysis is only valuable if you can effectively communicate the findings to decision-makers and ensure teams act on the insights.

Here are key strategies and tips to make your expense analysis presentation effective:

1. Use Visual and Interactive Tools

Incorporate charts, graphs, and infographics to simplify complex data. 

For example, a pie chart can help illustrate the proportion of expenses across various categories, while a line graph can show expense trends over time.

Further, interactive dashboards let users filter and drill down into specific data points, offering real-time insights and making the report more engaging.

2. Focus on Key Insights

Instead of overwhelming stakeholders with every detail, focus on the key takeaways from the analysis. 

Emphasize areas of overspending, potential savings, and cost drivers in simple terms and include clear, actionable recommendations based on the analysis. 

This helps stakeholders understand not just what the problem is but also how to address it.

3. Tailor the Report for Different Stakeholders

Different stakeholders are interested in different aspects of the expense report. 

For example, executives focus on the big-picture financial trends and ROI, while department heads want to understand department-specific spending. 

Customize your presentation to suit the audience. For busy stakeholders, begin with an executive summary, which provides a quick overview of the key findings and recommendations without delving into minute details.

Why Expense Analysis Is More Complex Than It Seems

Expense analysis begins with examining the P&L, but the sheer volume of data, when analyzed line-by-line, reveals data inconsistencies that delay analysis and complicate reporting. 

Inconsistent data stems from expenses being spread across various departments and systems. When consolidating this data from multiple sources, each with its own format, it forces finance teams to chase down managers and employees to fill in missing pieces and spend hours correcting discrepancies. This fragmentation makes it challenging to establish a reliable single source of truth.

Additionally, departments log expenses differently, increasing the risk of misclassification, which distorts the analysis. For instance, if a marketing expense is mistakenly categorized as an administrative cost, it negatively impacts budget assessments and future planning. 

These issues worsen with manual processes, which are time-consuming and prone to errors. With unreliable data, not only are decision-makers reluctant to act on recommendations, but it also becomes challenging to conduct analysis confidently.

What Is the Best Way to Analyze Expenses?

Effective expense analysis hinges on accurate, well-organized data and streamlined processes. 

An automated expense management tool, supported by clear policies, controls, and real-time expense visibility, reduces manual effort while enhancing data accuracy. Automation minimizes human error and discrepancies to build confidence in the data, creating a single, reliable source of truth.

For instance, Pluto simplifies the expense management process with its approval workflow builder, OCR capture (which also flags expenses in case of out-of-policy transactions and duplicate receipts), alerts and notifications, and a centralized dashboard for a complete overview. 

You get an overview of expenses across departments, vendors, and accounts, while Pluto takes care of data integrity, making it easy to spot trends, deviations, and cost-saving opportunities—all in real time. 

For a more in-depth look at expense automation and how Pluto specifically optimizes these processes, read our blog on expense automation.

Analyze Business Expenses With Confidence

Expense analysis goes beyond cutting corners and improving the bottom line in times of need. To truly gain control over spending, conduct expense analysis monthly or quarterly for better control over costs. 

With Pluto, you can review expenses anytime without worrying about data consolidation. Whether looking at expenses across vendors, departments, accounts, or even via employees, Pluto provides a bird’s eye view of expenses with interactive dashboards and the ability to drill down into details as needed.

Book a demo with Pluto today to see how you can simplify your expense management for reliable data at all times.