“We have to make some real cuts here.”
I ran the P&L and things weren’t good. A huge revenue dip, while software spend was up 45% and subcontract labor had doubled.
And not a doubling from $1 to $2, but a doubling of an already impactful number for this business.
When we got on the call with the owner, we led with the bad news.
“Things aren’t good and real cuts need to be made.”
We talked through the specifics.
There were serious problems in their sales and marketing process that meant a broken system lost them 20% of their revenue.
Then, looking at software, they had let anyone on the team “try tools.” So they ended up with duplicate subscriptions, overlapping CRMs, and a couple annual renewals hitting in the same month. There was no “decision” to do these things, just different teams working on different things.
At the same time, the owner was testing new product and service offerings and throwing subcontractors at the work to keep up. He sorta knew what he was doing, but too disconnected from the revenue dip to realize the problem in real time.
Again, each decision made sense in the moment. Together, it quietly rewrote their margin.
But calling this an expense problem is underselling it. They really had an attention problem.
No one was watching the house. Accounting was recording, but no one was analyzing.
By talking about it, we were able to adjust the subscriptions bloat immediately and over time revenue recovered. And when it did, the business was “lighter” and more profitable because of the work we did when things got hard.
Over the years, I’ve worked with 50+ businesses. At this point, I can see the signs and trends.
So today, I want to hit two things: why expenses creep, and what to do so you don’t end up “surprised” again.
WHY IT HAPPENS
No one thinks it’ll be them. Everyone thinks they have it under control, until they don’t.
In my experience, I’ve seen the same signs over and over:
- Expenses multiply quietly. A $200/month tool here, a $1,500/month subcontractor there, a “temporary” admin hire that becomes permanent. None of it feels like a decision until you add it up.
- The chart of accounts is a mess. If people have 25–30 categories to pick from, they don’t create better data. They create random data. Garbage coding makes it impossible to see what’s really changing.
- Owners chase revenue and ignore friction. Revenue feels productive. Expense cleanup feels like housekeeping. But margin is where the business gets funded.
- Too many people with unchecked authority. If anyone can approve recurring spend, you don’t have an expense policy. You have a hope-and-pray system. That client had multiple people committing to expenses in different departments, with no way to catch it before the commitment was made.
- Misclassified costs distort reality. If direct labor is buried in operating expenses instead of COGS, your gross margin is fiction. And when gross margin is fiction, every pricing decision you make is a guess.
- Most “reviews” are reactive. Owners look after a bad month. The goal becomes “make the pain stop,” not “build a simple system that keeps us healthy.”
Do you see yourself in any of these? I’m sure you do… at least one or two, right? We all do and should. They’re common and a part of the human “condition.”
So what do we do?
WHAT TO DO
Below is a list of the five best things to do to get and keep your expenses in check. If you look at this and say “no way I’m doing all this,” promise me you’ll skip to the last one and just do that one.
If nothing else, that one alone will transform your business.
QUARTERLY EXPENSE REVIEW
Set a rhythm: quarterly, not “when you feel it.” Put a 30-minute expense review on the calendar every quarter. Same week, same day, same agenda. Don’t skip because you tell yourself “I’ll remember.” Consistency beats intensity here.
- Start with the variance, not the total. Pull the P&L and ask one question first: What moved? Look for lines that are up or down 10–15% (or a meaningful dollar amount for your size). The goal is to find the story behind the change.
- Ask yourself: What are we paying for that we wouldn’t buy again today?
- An additional note here: don’t get caught up on having to solve everything. Make sure you pick, at minimum, one high leverage thing. If that’s it, you’ve done your job. Then, when you stay consistent, you’ll make long-term progress. A few of what a high leverage thing could look like:
- cancel a tool
- renegotiate a vendor
- tighten approval
- recode costs correctly
- pause a hire
- adjust pricing because delivery costs are higher than you thought
MONTHLY KEY ACCOUNTS REVIEW
Pick 3–5 “owner lines” you always review monthly.
You don’t need to analyze every line item every month.
Choose the buckets that actually matter:
- Payroll (and subcontractors)
- Marketing
- Software/tools
- Vehicles/travel
- Rent/occupancy
- Insurance
- Repairs/maintenance
- Professional fees
Pick these based on variability and size. You probably know off the top of your head what these are for your business. Make sure that each month you dig a bit deeper here.
This stops the drift. You’ll catch the leaks before they turn into a problem.
REQUEST MONTHLY RECONCILIATION OR TRANSACTION DETAIL REPORTS
Ask for a transaction detail report monthly.
When your team does their reconciliations, ask for a package that has transaction-level detail.
Even if you don’t review it every month, making it easily accessible is a great way to get it reviewed more often.
I like these being printed and physical, but a clean PDF or Excel file works fine too. Flip through and ask about anything you don’t understand.
IMPLEMENT AN APPROVAL POLICY FOR RECURRING EXPENSES
The fastest way expenses blow up is recurring spend.
I don’t know what’s best for your business, so you’ll have to decide what works best for you, but create some sort of light touch policy for recurring charges.
This could be that anything recurring needs owner approval or the owner receiving a monthly report from accounting on what new recurring charges there are.
This may not be “forever,” but is a good practice and reminder when trying to tighten the belt.
THE BIG ONE: GROSS MARGINS
One thing I want to call out especially (maybe I shouldn’t have put it at the end then, hey, I make the decisions here, not you): Fix the margin math (COGS vs opex).
If you only do one thing, this is the thing. You need to understand your gross margins inside and out.
Make sure the costs to deliver the work live in COGS. That includes direct labor in many service businesses. If you can’t see true gross margin, you can’t see pricing power. Create a process you’ll follow each month and get picky. If gross margin moves by 0.2%, ask why and go find the answer.
If you only looked at one thing monthly, fixing gross margins should be your one thing.
SMALL ACTIONS, BIG RESULTS
If you want more cash and more margin, don’t start with a massive one-time overhaul. Start with a simple expense review rhythm. Consistent progress over time not only compounds, but it changes culture, which accelerates compounding even more.
The goal here is two fold:
- Catch bad spend or overspend
- Change the spending culture
As a finance guy, it’s probably no surprise I want that. We have that “cut cut cut” reputation. But that isn’t why we’re doing this. We’re doing this because every dollar matters. And when we treat every dollar like it matters, it creates room for spending in the ways that’ll actually grow the business (and cash in your pocket).
So, before you click off this email or page add an expense review to your calendar
It’s amazing what a little focused attention can do.
