22 Apr, 2020
To preserve cash during this period of business uncertainty, one common management response is to review all business expenses. Managers are seeking to eliminate, reduce or delay costs, where possible. This requires the identification of any non-essential expenses.
Examples of ‘essential’ expenses, which are difficult to eliminate may include:
- Interest costs
Examples of ‘non-essential’ expenses, which may be easier to eliminate or reduce include:
- Other marketing expenses
Breakdown charts in Fathom assist with the analysis of expenses and answer questions like:
- Q. What are the major business expenses?
- Q. Are there any significant non-essential (discretionary) expenses?
These charts enable you to easily review expense accounts in a highly visual way. For any periods, expenses accounts can be sorted by amount to quickly assess which expenses are most significant. For example:
If the breakdown analysis reveals that ‘Staff costs’ make up a considerable portion of your overheads (eg. 70% of Total Expenses), then it may be helpful to track significant individual expense accounts in your reports.
Track Key Numbers
Additionally, the ‘Key Number’ component is useful for monitoring these accounts in your reports.
This component highlights the result for an account, and also shows variance from budget or prior period. Additionally, a sparkline chart shows any trends for the account.
Reviewing Fixed and Variable Expenses
When seeking to adjust areas where costs can be minimised, it may also be helpful to review whether costs are fixed or variable in nature. The distinction between these types of expenses is important when calculating the breakeven point and also to identify any economies of scale for the business. First, let’s define what we mean by ‘Fixed’ versus ‘Variable’.
Fixed costs do not vary directly in proportion to revenue. To determine these costs, consider expenses that would still be incurred if the business was shut down during the current crisis. Examples include: rent, telephone costs, internet costs, insurance, loan payments. Businesses with a higher proportion of fixed costs are more vulnerable to sales decline than other businesses, because they may not be able to reduce fixed costs as sales fall.
Variable costs increase or decrease closely in proportion to revenue. These costs are associated directly with business activity. Some examples include: commissions, direct labour, materials etc... If you are able to optimise variable expenses, there may be a larger cash flow benefit down the line. If the business obtains cost advantages here, then additional sales will result in incremental profit earned for each unit sold.
Tip. You can review your Fixed and Variable costs and expenses using trend charts in your Fathom reports. You can also re-classify accounts as ‘Fixed’ or ‘Variable’ in the Fathom company settings.
In times of business uncertainty use Fathom's breakdown charts to track business expenses.
Log in to Fathom and use Breakdown Charts and Key Number components to review your fixed and variable costs to understand which expenses can be reduced. Not a Fathom subscriber? We offer a 14 day free trial, no credit card required.
Written by Allanah Miller
Allanah is a Product Manager at Fathom, having previously worked closely with our customers in Account Management over the last few years. As a qualified CPA, Allanah brings vital accounting acumen to help us build the best possible product. Before joining the team at Fathom, Allanah studied at UCLA and worked with PwC for three years as a Senior Tax Associate.