Are my expenses in line with what they should be given my revenue?
Expenses only make sense relative to revenue. A $50,000 payroll is fine at $200K revenue and dangerous at $80K. Here's how to check whether your spending is proportional to what you are earning.
The short answer
Compare each expense category as a percentage of revenue. If payroll is 55% of revenue, you keep 45 cents of every dollar before anything else. If ad spend is 18%, that needs to generate enough new business to justify it. Below, we show you how to calculate these ratios and which benchmarks to use.
Why expense ratios reveal problems that dollar amounts hide
Your payroll was $42,000 last month and $48,000 this month. A $6,000 increase. Feels manageable if revenue also grew. But revenue only went from $88,000 to $92,000. Payroll as a percentage of revenue jumped from 47.7% to 52.2%. That 4.5 point swing means you are keeping less of every dollar even though your top line grew.
Dollar amounts are misleading because they do not account for scale. A $100K business spending $8K on software is being crushed (8%). A $500K business spending $8K on software is fine (1.6%). Same expense, completely different story.
The question is not “how much am I spending?” It is “how much am I spending relative to what I am earning, and is that ratio getting better or worse?”
The expense ratios every business owner should know
Here are the key categories and rough benchmarks for small businesses. Your industry will vary, but these give you a starting point:
- Payroll (including taxes and benefits): 25-50% of revenue for most service businesses. Above 55% is a warning sign unless you are in a labor-intensive industry.
- Advertising and marketing: 5-15% of revenue for established businesses, up to 20% for businesses in growth mode. Above 20% needs to show clear ROI.
- Software and tools: 2-5% of revenue. Above 8% suggests subscription sprawl.
- Rent and occupancy: 5-10% of revenue. This is largely fixed, so the ratio improves as revenue grows.
- Total expenses: Should leave you with a net margin of 5-20% depending on your industry. If total expenses are 95%+ of revenue consistently, your business model needs attention.
How to check expense ratios in QuickBooks Online (5 steps)
- 1Open the Profit and Loss report
From the left sidebar, click Reports. Search for “Profit and Loss” and set the date range to the current month.
- 2Enable the “% of Income” column
Click Customizeat the top of the report. Under “Rows/Columns,” check the box for % of Income (or “% of Row”). Click Run report. Now every expense line shows its percentage of total revenue automatically.
- 3Review the largest percentages
Scan the percentage column for any category above 10%. Those are your big expense drivers. Payroll will likely be the largest, followed by COGS and advertising.
- 4Add a comparison period
In the Customize menu, add “Previous period” as a comparison. Now you see this month's percentages alongside last month's. Look for categories where the percentage went up even if the dollar amount seems small.
- 5Flag categories growing faster than revenue
If a category's percentage is rising month over month, that expense is growing faster than your revenue. This is the early warning sign of margin erosion.
Total time: about 6 minutes. The % of Income column in QuickBooks does most of the math for you. The comparison adds context.
How to check expense ratios in Xero (4 steps)
- 1Go to Accounting → Reports → Profit and Loss
Set the date range to the current month. Click Update.
- 2Calculate percentages manually
Xero does not have a built-in “% of revenue” column on the standard P&L. You will need to divide each expense category by Total Revenue yourself. Focus on the 5-6 largest categories first.
- 3Add a comparison period
Select “Compare with: Previous Period.” Calculate the percentage for each category in both months. Which percentages went up?
- 4Export to spreadsheet for deeper analysis
Click Export to download the report as a spreadsheet. Add a column that divides each expense by total revenue. This lets you sort by percentage and see the full picture.
Total time: about 10 minutes. Xero requires more manual calculation than QuickBooks for this specific analysis. The spreadsheet export makes it easier to do the math.
What it takes to benchmark expenses against revenue monthly
- 6-10 minutes per month to pull the P&L, enable or calculate percentages, and compare to last month.
- Industry benchmarksto know what “good” looks like. A 55% payroll ratio is fine for a consulting firm and alarming for a product company. Without benchmarks, the percentages are just numbers.
- Diagnosis when ratios change. Knowing payroll went from 48% to 52% is step one. Knowing that it was driven by a new hire (expected) vs. overtime (concerning) requires digging into the details.
Or see expense ratios automatically, every month
Bottomline calculates every expense category as a percentage of revenue and shows you which ones are growing faster than your top line:
Categories with rising ratios are flagged in red so you can spot the problem areas immediately. And because Bottomline connects to more than just your accounting software, it adds context. If payroll is up because you hired someone, it shows that alongside your pipeline data so you can see whether the hire is supported by incoming revenue.