How do you distribute monthly expenses to ensure a stable net profit?

Aug 17
4 min read

Updated: Aug 27

Introduction

In the world of business, it is not enough to achieve high sales or see revenue numbers rising, it is more important Maintaining net profit constant or continuing growth. Many owners of small and medium enterprises fall into the trap of increasing expenses unwisely, which leads to the erosion of profits, even as sales rise.

Managing monthly expenses is a skill no less important than the skill of increasing sales. The correct distribution of expenses helps control cash flows, avoid financial crises, and ensure the stability of the project in the long term.

In this article, we will explain in detail How can you distribute your monthly expenses intelligently?, so as to ensure that net profit is maintained constant, whatever the circumstances.

First: Understanding the profit equation

Before getting into the distribution of expenses, we must know Basic equation Which determines profit:

This means that any unaccounted increase in expenses will directly affect net profit. Conversely, any reduction in expenses without compromising the quality of the product or service will often lead to improved net profit.

Second: Classification of monthly expenses

In order to better manage your expenses, you must first classify them into clear sections:

Fixed expenses These are the expenses that you pay monthly regardless of the volume of sales, such as: rent, fixed salaries, basic electricity, water and internet bills, insurances and subscriptions.
Variable expenses These change according to the volume of production or sales, such as: raw materials, shipping and delivery costs, commissions on sales, advertising campaign costs.
Emergency/reserve expenses These are the amounts that you allocate to confront any unexpected event, such as: sudden maintenance of equipment, increase in the price of materials, legal or regulatory expenses.
Investment expenses It directs it to develop the project in the long term, such as: purchasing new equipment, developing a website, expanding the branch, or adding new products

Third: The golden rule for distributing monthly expenses

There are many ways to distribute expenses, but one of the most commonly used practical rules is the... 50-30-20, modified to suit the nature of the business.

Proposed distribution of business expenses:

50% basic operating expenses (salaries, rent, services, raw materials)
20% marketing and sales (Ads, promotional campaigns, sales commissions)
15% development and investment (Equipment renewal, employee training, product improvement)
10% emergency reserve
5% administrative and secondary expenses (Bank fees, additional subscriptions)

Fourth: Practical steps to distribute expenses intelligently

1. Accurately determine expected monthly revenues

Expenses cannot be allocated without knowing the expected revenues. You can calculate the average revenue from the past months, taking into account seasons or changes in demand.

2. Determine the maximum limit for each item

Set a ceiling on expenses for each department, such that marketing expenses do not exceed 20% of revenues, even if there are attractive offers to increase advertising.

3. Set aside an emergency fund

Many projects collapse due to unforeseen expenses. Therefore, it is important to set aside at least 10% of revenue for emergencies.

4. Review expenses monthly

Set aside time at the end of each month to review your expenses item by item, and analyze the differences between the planner and the implementer.

5. Reduce unnecessary expenses

Ask yourself:

Do these expenses contribute directly to increased revenues or improved quality?
If the answer is no, consider reducing or eliminating it.

Fifth: Practical examples of distributing expenses

Example 1: Local coffee shop

Monthly revenue: 50,000 riyals
Distribution of expenses: 25,000 riyals operational expenses (salaries, rent, electricity, raw materials) 10,000 riyals marketing 7,500 riyals development and renovation 5,000 riyals for emergencies 2,500 riyals administrative expenses

Example 2: Online store

Monthly revenue: 100,000 riyals
Distribution of expenses: 50,000 riyals operational (storage, shipping, salaries, subscriptions) 20,000 riyals paid advertising 15,000 riyals development (improving the site, adding products) 10,000 riyals reserve 5,000 riyals administrative expenses

Sixth: Tips to ensure stable net profit

Rely on a clear accounting system Even if it is simple, the important thing is to record every financial transaction accurately.
Monitor your expense-to-revenue ratio If this percentage increases, this is a danger indicator that must be dealt with.
Invest in what increases productivity Such as sales management systems or marketing automation tools.
Avoid expense inflation while increasing revenues Some entrepreneurs automatically increase spending when profits increase, and this is a mistake.
Review supplier and service contracts periodically You may find opportunities to lower prices or improve conditions.

Seventh: Common mistakes that should be avoided

Neglecting your emergency fund: It makes you resort to borrowing during crises.
Excessive spending on marketing without measuring results.
Failure to differentiate between operating and investment expenses.
Relying on seasonal revenues and distributing expenses as if they were fixed throughout the year.

Conclusion

Managing monthly expenses is not just a calculation; A strategy that maintains the stability of your project and protects it from fluctuations. Smart allocation of expenses, with constant review, ensures a stable net profit and gives you the ability to expand with confidence.

If you start applying these rules today, you will notice within a few months that your profits have become more stable, and that you are able to face any financial challenges without fear.