Understanding Your Business Expenses: The Key to Sustainable Profitability

Have you ever wondered where your revenue is actually going? You’re making sales, but somehow, your profit isn’t growing the way you expected. The truth is, revenue is only part of the picture—understanding your expenses is the missing piece to ensuring your business remains profitable.

In this post, we’ll break down three essential things every coach and business owner must know about expenses:
1️⃣ What they are and how they impact your bottom line
2️⃣ The difference between direct costs and operating costs
3️⃣ How to track and analyze your expenses to maintain healthy profit margins

Let’s dive in and take control of your numbers once and for all.

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Know What Your Expenses Are—And Why They Matter

One of the biggest questions business owners have is:
“How much should I be spending on different areas of my business?”

Whether it’s your team, professional development, software, or operational costs, it’s easy to let expenses creep up as revenue grows. But without a clear plan, increased expenses can quickly drain your profits.

I once worked with a service provider who saw a major increase in sales. Excited by their growth, they expanded their team, leased a company vehicle, and took on more overhead expenses. But when revenue dipped the following year, their expenses remained the same—or even increased slightly—which resulted in much lower profits and tighter cash flow.The key takeaway? Revenue growth does not automatically mean profit growth. Without careful expense management, your profit can shrink even as your business scales.

Direct Costs vs. Operating Costs: Why You Need to Separate Them

When thinking about expenses, it helps to categorize them into two main types:

✔️ Direct Costs (also known as Cost of Goods Sold) – These are expenses directly tied to delivering your product or service.
Examples include:

• Payment processing fees
• Subcontractor wages
• Shipping costs for physical products

✔️ Operating Costs – These are ongoing expenses that exist whether or not you make sales.
Examples include:

• Software subscriptions
• Rent and utilities
• Business licenses and fees

Why does this matter? Because high direct costs reduce your gross profit margin, leaving you with less money to cover operating expenses and pay yourself.

A simple formula to track this:
Revenue – Direct Costs = Gross Profit💡 Tip: For service-based businesses, direct costs should not exceed 30% of your revenue. If they do, it’s time to assess whether your pricing is too low or if there are inefficiencies in your process.

Track Your Expenses Year Over Year to Spot Trends

One of the biggest mistakes business owners make is ignoring the rise in expenses over time. Even if revenue increases, if expenses grow at a faster rate, your profit margins shrink.

✔️ Compare your expenses this year to last year. Are they rising faster than revenue?
✔️ Look at expense categories. Which ones saw the biggest increase?
✔️ Evaluate your spending. Are these investments helping your business grow, or are they unnecessary?

I recently helped a client cut over $300 per month in unnecessary software subscriptions just by reviewing their expenses and asking, “Is this actually supporting my business growth?”

How to Stay on Top of Expenses & Protect Your Profit

✔️ Set clear spending guidelines (e.g., team expenses should not exceed 20-25% of revenue)
✔️ Negotiate better rates for software, credit card interest, and recurring services
✔️ Track expenses regularly to prevent unnecessary spending
✔️ Reinvest strategically in high-ROI activities like coaching, consulting, or legal protections

Final Thoughts: Expenses Don’t Have to Be Overwhelming

When you have a clear strategy in place, expenses become a tool for growth rather than a drain on your profit. The key is intentionality—knowing where your money is going and ensuring that every expense aligns with your business goals.

Take Action: Compare your year-over-year or quarter-over-quarter expenses and identify key trends. Did your costs increase or decrease? Are they aligned with your revenue growth? Let me know in the comments or DM me on Instagram at @harmoniouswealth!