Expenses vs Earnings

What is an acceptable percentage of expenses for a business?
If mine are 30% a month, is that good? Should it be 20%? What do companies or the business colleges say is the correct balance? When calls come in, what percent is considered good to make the sale? Where would I find this type of information? Is there a good website to look up these types of questions?

It’s not that simple, and I know enough to know I could never explain it to you so you would understand it. There are a million sites to go to for more information and to learn how to calculate business numbers. Here is one to get you started… (Click the links to delve deeper)… http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/gross-margin-2208

I can answer your questions in great detail Mark, but you have to be more concise about your definition of “expenses.”

BTW, congratulations on starting this thread. It is likely the most important topic ever discussed here.

My first year overall was nearly 70% expenses with 30 % left over. Because of all the startup costs I figured that was not too bad. Made things very tight but with my small pension and being able to swing a hammer to supplement our income it wasn’t overwhelming. As of this year so far we are sitting around the 60% expense markand for some reason the market here in Manitoba seems to be as good as trying to sell sand in the Gobi. Can’t figure out why except that we have a new 1 year old untested government who is on a spend and tax kick and people are buying but are shying away from any extras. We just had a case hit the news here also of a young couple who got burned on a house deal with no inspection and are now looking at $30k to bring all the disaster reno’s into compliance. I tell people this and still some say that a home inspection is over rated and to high an expense. Lead a horse to water, shove their face in and still some won’t take a drink.

My expenses are pretty low, I have an 11 year old car that has been paid off for years.
I don’t buy new tools very often except as replacements.
Advertising consists of the occasional batch of printing brochures/cards/pens.
ACC is one of my larger expenses but well worth it.
With all the other usual biz expenses I come out at about 10 - 15% per year.

Expenses = anything you are paying for to operate the buisness… Vehicle-fuel,repairs,ins. etc, E/O/liability ins. Taxes, advertising, clothes , supplies, dues/fees, and many others.
I just have two columns, money coming in - earnings, the plus side, and expenses, the negative or cost of doing business side.

Jeffrey, thanks for the good link.

I would think the answer in part, would vary depending on how established you are.

My 1st year, every penny I made went back into my business. Since then, it’s gradually less and less.

Someone like Thomas who’s been doing this a long time has lower need for spending on expenses.

True, although “long time” is relative, compared to Dan Bower I’m a newbie.:wink:

But your point is correct Ian.

The other factor is gross income vs. operating expenses.
Now that I’m established my gross income dwarfs my expenses.
So it’s not much of a factor.

Are there general ranges or percents to model after?

You have to divide your costs into categories, you can’t lump them, because they are apples and oranges. There are the costs you have to pay whether you like it or not, such as licensing fees, membership fees insurance, stuff like that, the ‘suck it up’ costs if you will. They are also most likely ‘fixed costs’ costs that don’t change regardless of your revenue. Other fixed are tools and equipment, minimal for HIs, or a vehicle, which can be a major cost, there is stuff you need to have regardless of how much activity you have.

Then there are variable costs, the costs of doing business, the more business you do the more they increase. You can control variable costs to a certain extent. If you are a home inspector you have to drive to your inspections, the more you drive, the greater the cost. So is it worth it to drive 100 miles for an inspection? Is it worth it to drive a hummer instead of a mini van? If you have a choice you can save money. Consumables are another variable cost. If you print your contracts, invoices etc., you will be buying paper, printer ink, etc… With a spreadsheet you can figure out whether it is worth it to buy an ipad to go paperless, based on your business volume.

Another important category are promotional costs, advertising etc., Supposedly the more you spend on promotion the more business you will get, a variable cost, but this may not (more like probably not) be true, it is easy to track expenses such as the cost to drive to an inspection, but how do you determine how well your advertising is working? You will be approached by all kinds of people who will make all kinds of promises. Never forget what business they are in, and who they are working for. They are in the persuasion business, and they are working for themselves. Too many put all their effort into persuading you to hand over your money, as opposed to persuading others to hand over their money to you. There are ways to monitor what is working and what is not, such as advertising a small discount that clients have to ask for to get, if they ask for it you know they saw the ad. Avoid annual auto renewable contracts for advertising, you need to be able to blow them off at any time you are not happy, a month to month relationship also helps to keep your advertiser motivated to keep your business :slight_smile:

My favorite costs are the ones you pay to yourself :slight_smile: Tax deductible reimbursement for expenses, office rent, mileage, whatever tax laws let you get away with. Be as generous as you are allowed to be, because you are getting reimbursed for expense incurred, you don’t need to declare them as personal income, and you can deduct them from business income before taxes.

Excellent post.

Good info Jeffrey

Erik wrote that excellent post.

Don’t forget about taking equity distributions.
If you are an S Corp you can take equity distributions.
They are taxed at a different rate than payroll.

Yes thanks Erik!

I can answer your questions in great detail Mark, but you have to be more concise about your definition of “expenses.”