One of the things I’ve learned over the years is that businesses rarely get into financial trouble because of one bad decision. More often, it’s a series of small decisions that seemed perfectly reasonable at the time.
A new employee to handle the growing workload. Another software subscription to make things easier. A piece of equipment that probably could have waited another six months.
None of these decisions necessarily looks like a mistake. In fact, each one might make good business sense on its own.
The trouble starts when expenses keep growing, but revenue isn’t keeping up.
And here’s what makes this particularly dangerous: Your business can be bringing in more money than ever and still be moving in the wrong direction financially.
I’ve seen business owners get excited about increasing sales without realizing that their expenses were growing even faster. By the time they noticed the problem, their profit margins had already taken a beating.
The good news is that there are usually warning signs long before things get serious. You just have to know where to look.
Let’s walk through seven of the most important ones.
1. Your Expense to Revenue Ratio Keeps Climbing
This is probably the first number I’d recommend looking at if you’re concerned about rising expenses.
Your expense to revenue ratio tells you how much of every dollar coming into the business is being consumed by expenses.
The calculation is simple:
Total Expenses ÷ Total Revenue × 100 = Expense-to-Revenue Ratio
Suppose your business generates $20,000 in monthly revenue and has $14,000 in expenses.
Your expense-to-revenue ratio is 70%.
That means you’re spending 70 cents of every revenue dollar to operate the business.
Now imagine that three months later, revenue has increased to $23,000, but expenses have climbed to $18,400.
Your ratio is now 80%.
Sales are up 15%, which sounds encouraging. Unfortunately, expenses have increased by more than 31%.
That’s a problem worth investigating.
What matters isn’t necessarily the ratio itself. Different businesses have different cost structures. A retail operation, for example, will have a different expense profile than a consulting business.
What you’re really watching for is the trend.
If the percentage keeps increasing month after month, your business is becoming more expensive to operate relative to the revenue it generates.
What I would do
Review this ratio monthly, using consistent expense categories and the same accounting method. Compare the results over at least three or four months.
If the ratio is climbing, identify which expense categories are responsible. You might discover that payroll is increasing, supplier costs have risen, or overhead expenses are gradually getting out of control.
The important thing is to find out what’s happening before it becomes a serious problem.
2. Your Software Subscriptions Are Multiplying
Here’s an expense category that can sneak up on almost any small business owner.
Software subscriptions.
Think about how easily they accumulate.
You sign up for a project management tool. Then you add an email marketing service. Maybe you need a scheduling application, a cloud storage upgrade, or another program to handle a particular task.
Each one costs $15, $30, or $50 a month.
Individually, they don’t seem like much.
But what happens when you have fifteen or twenty subscriptions?
Suddenly, you’re spending several hundred dollars every month, and you may not even remember what half of them do.
I’ve always believed that business expenses should have a purpose. If you’re paying for something, it should contribute to your operation in a meaningful way.
That doesn’t mean every expense needs to generate revenue directly. Some tools save time, reduce errors, or improve customer service. Those benefits have value, too.
But paying for software nobody uses? That’s simply wasted money.
What I would do
Pull your bank and credit card statements for the past three months.
Make a list of every recurring subscription, including its monthly cost and purpose.
Then ask yourself three questions:
- Are we still using this?
- Is it providing enough value to justify the cost?
- Are we paying for another program that does essentially the same thing?
You may be surprised by what you find.
And don’t forget annual subscriptions. They can be easy to overlook because they don’t appear on every monthly statement.
3. Payroll Is Growing Faster Than Sales or Productivity
Hiring employees is often a sign that a business is growing.
But there’s an important distinction between adding employees because the business can support them and adding employees because everyone feels overwhelmed.
I’ve seen situations where owners assumed that being busy automatically justified hiring another person.
Sometimes it does.
Other times, the real problem is inefficient processes, poor scheduling, or work that could be handled differently.
Here’s an example.
Suppose your payroll expenses increase by 15% over six months, while revenue increases by only 5%.
That doesn’t automatically mean you’ve made a bad hiring decision. You might be training employees who will help generate additional revenue later.
But it does mean payroll is consuming a larger percentage of sales.
And if that pattern continues, profitability will suffer.
What I would do
Compare payroll growth with revenue growth over the same period.
Then look at productivity.
Are employees producing more? Are customer orders being completed faster? Has service improved? Are you generating additional business because of the people you’ve hired?
Also, look at overtime.
If you’re consistently paying substantial overtime, it might indicate that your staffing levels or scheduling practices need attention.
Before adding another employee, I’d want to understand whether the workload truly requires more people or whether existing processes could be improved.
The goal isn’t to keep payroll as low as possible. It’s to make sure your labor costs are producing reasonable value for the business.
4. You’re Using Savings or Credit to Pay Regular Bills
This is one warning sign I would take particularly seriously.
There’s nothing inherently wrong with using business credit. A line of credit can help manage seasonal fluctuations, unexpected repairs, or temporary differences between when expenses must be paid and when customers pay you.
But regularly borrowing money to cover ordinary operating expenses is another matter.
Think about it.
If your business needs to use a credit card to cover rent, payroll, or recurring supplier bills every month, something deserves closer attention.
You may have a cash flow timing problem. Perhaps customers are taking too long to pay, even though the business is profitable.
Or you may have a more fundamental problem: expenses are simply too high for the revenue being generated.
Those are two different situations, and they require different solutions.
What I would do
Start by reviewing the past three months.
How often have you transferred money from savings or used borrowed funds to cover normal operating expenses?
Next, determine why.
If customers owe you substantial amounts of money, improving collections and payment terms may help.
If revenue simply isn’t sufficient to cover expenses, you’ll need to examine your cost structure, pricing, or both.
Either way, don’t let borrowing become the automatic solution.
Credit can help a healthy business manage temporary cash shortages. It cannot permanently solve an operation that consistently spends more than it earns.
5. Purchases Are Being Made Without Much Thought
This is an area where a little discipline can make a surprisingly big difference.
In smaller businesses, purchasing decisions are often informal.
Someone needs a tool, supplies, or a piece of equipment, so they order it.
The owner sees something that might improve operations and buys it.
A department manager decides to upgrade a service without checking whether the additional cost fits the budget.
None of these purchases may be unreasonable.
But without some type of review process, unnecessary spending can gradually become part of the company’s culture.
One approach I’ve found particularly useful is a purchase order and approval system.
It doesn’t have to be complicated.
The basic idea is that certain purchases must be approved before the money is committed.
For example, you might allow employees to make routine purchases up to $100 without additional approval. Purchases between $100 and $500 might require a manager’s approval, while anything above $500 requires the owner’s authorization.
The actual amounts will depend on the size and nature of your business.
What matters is establishing clear expectations.
What I would do
Create a simple purchasing policy that answers three questions:
- Who has the authority to make purchases?
- What spending limits apply?
- When is additional approval required?
For larger purchases, I’d also recommend asking whether the expense is necessary now or could reasonably be postponed.
A purchase order system does more than control spending. It creates accountability and helps ensure that purchases are evaluated before they’re made.
I’ve found that having to justify a purchase often leads people to think more carefully about whether it’s really needed.
And that’s not a bad habit for any business to develop.
6. You’ve Stopped Comparing Actual Expenses to Your Budget
I can’t tell you how many times I’ve encountered businesses that put considerable effort into preparing an annual budget and then rarely looked at it again.
They had a budget.
They just weren’t using it.
A budget isn’t supposed to be a document you create in January and file away until December.
It’s a management tool.
Its real value comes from comparing what you expected to happen with what actually happened.
Let’s say you budgeted $2,000 a month for marketing.
After reviewing your financial reports, you discover that actual spending has averaged $2,700 over the past three months.
That’s a $700 monthly difference.
Maybe the additional spending is producing excellent results. If so, it might be justified.
But what if nobody has checked whether those extra marketing dollars are generating additional business?
That’s where problems begin.
What I would do
Set aside time each month to compare actual expenses against your budget.
Pay particular attention to categories that are consistently over budget.
And don’t stop at identifying the difference.
Ask why it happened.
Was it caused by higher prices? Increased activity? An unexpected expense? Or simply a lack of spending control?
Not every unfavorable budget variance is a problem. Sometimes spending more is the right decision.
But every significant variance deserves an explanation.
A budget should help you make better decisions, not simply tell you how much money you’ve already spent.
7. Every Month Seems to Have Another “One Time” Expense
This is one of my favorite warning signs because it’s so easy to overlook.
Every business has occasional expenses that don’t occur regularly.
A piece of equipment breaks. A computer needs replacing. You decide to attend a trade show or launch a special marketing campaign.
These things happen.
But here’s the question I’d ask:
If you’re having an unexpected expense almost every month, is it really unexpected anymore?
Suppose you spend $1,200 on an equipment repair in January.
In February, you replace a computer for $1,500.
March brings a $900 office improvement, and April includes an unplanned $1,400 marketing expense.
Each purchase may have been justified.
But over four months, you’ve spent an additional $5,000 that wasn’t part of your regular operating budget.
That’s an average of $1,250 a month.
If this pattern continues, it’s no longer reasonable to treat these expenses as isolated events.
They’re becoming part of the cost of doing business.
What I would do
Review the past six to twelve months and identify expenses that were classified as unusual or one time purchases.
Add them together.
Then consider whether some of these costs should be included in future budgets.
You might establish a monthly reserve for equipment replacement, repairs, or other irregular expenses.
That doesn’t mean you can predict exactly when something will break or need replacing.
It means you’re acknowledging that unexpected expenses are, to some extent, predictable.
And planning for them is much better than being surprised every month.
A Simple Monthly Expense Review Can Make All the Difference
You don’t need to spend hours analyzing financial reports to keep expenses under control.
For many small businesses, a focused monthly review can reveal problems before they become serious.
I’d recommend setting aside thirty minutes each month to answer a few basic questions:
- Are expenses growing faster than revenue?
- Which expense categories have increased the most?
- Are payroll costs reasonable compared with sales and productivity?
- Have we added recurring expenses that no longer provide enough value?
- Are we using savings or credit to cover normal operating costs?
- Where are actual expenses exceeding our budget?
- Are supposedly one-time purchases becoming a regular occurrence?
You don’t have to solve every problem during that meeting.
The first objective is simply to identify what needs attention.
Then decide who will investigate it, what action needs to be taken, and when you’ll review the results.
I’ve always believed that good financial management is less about complicated calculations and more about consistently paying attention to the right numbers.
A business owner who reviews expenses every month is in a much better position to make informed decisions than someone who waits until the bank account starts getting uncomfortable.
Using QuickBooks to Keep Expenses Under Control
One of the challenges small business owners face is having financial information scattered across bank statements, spreadsheets, invoices, and credit card accounts.
That’s where a tool like QuickBooks can be particularly helpful.
QuickBooks allows you to categorize and track expenses, monitor income, and generate financial reports that make it easier to see where your money is going. Depending on your subscription, you can also use budgeting and comparison reports to identify differences between planned and actual spending.
Instead of trying to piece together your financial picture at the end of every month, you can have much of the information organized in one place.
Of course, software won’t make spending decisions for you. But it can provide the information you need to make those decisions with greater confidence.
Want a clearer picture of where your business money is going? Take a look at QuickBooks and see how its expense tracking and reporting features could help you stay on top of your finances before small problems become expensive ones.
Frequently Asked Questions
How do I know if my business expenses are too high?
Start by comparing total expenses with revenue and tracking that relationship over several months.
A steadily increasing expense to revenue ratio can indicate that costs are growing faster than sales.
However, there isn’t one ideal ratio for every business. Your industry, operating model, and profit margins all matter.
The most useful approach is to compare your current performance with your own historical results and, where possible, relevant industry benchmarks.
How often should a small business review its expenses?
I recommend reviewing expenses at least monthly.
Businesses experiencing cash flow difficulties, rapid growth, or significant changes in operating costs may benefit from weekly reviews of cash balances and upcoming payments.
The important thing is consistency. Regular reviews make it easier to recognize trends before they become major problems.
Should I cut expenses whenever revenue slows down?
Not necessarily.
Some expenses are essential to maintaining operations, serving customers, and generating future revenue.
Cutting marketing, employee training, or maintenance without considering the consequences could create bigger problems later.
I’d start by identifying unnecessary spending, under used subscriptions, inefficient processes, and purchases that can be postponed.
The goal should be to eliminate waste without damaging the business’s ability to operate and grow.
Can a business be profitable and still have cash flow problems?
Absolutely.
A business might report a profit while waiting for customers to pay outstanding invoices.
At the same time, payroll, rent, loan payments, and supplier bills still need to be paid.
That’s why it’s important to monitor both profitability and cash flow. They tell you different things about the financial health of your business.
What’s the first expense I should review if money is getting tight?
I’d begin with expenses you can control without disrupting essential operations.
Recurring subscriptions, discretionary purchases, unnecessary service upgrades, and avoidable overtime are good places to start.
Then I’d look more closely at larger expense categories, including payroll, inventory, and overhead.
Don’t assume the largest expense is automatically the best one to cut. Consider how each expense contributes to the business before making a decision.
Wrapping Up: Small Expense Problems Rarely Stay Small
One thing I’ve learned from working with businesses is that financial problems are usually easier to prevent than they are to correct.
A subscription you no longer need isn’t going to put you out of business.
Neither is one unnecessary purchase or a month when payroll runs a little higher than expected.
But when those things become habits, the combined effect can gradually erode profitability and put pressure on cash flow.
And the longer those patterns continue, the harder they can be to reverse.
That’s why I encourage business owners to pay attention to trends rather than waiting for a crisis.
You don’t need perfect financial reports or an elaborate budgeting system to get started. You need reliable numbers, a willingness to ask questions, and the discipline to review your results regularly.
The best time to control an expense problem is while it’s still small enough to fix without disrupting your business.
And sometimes, all it takes to recognize that problem is thirty minutes with your financial reports and a few good questions.
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