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This article is for educational purposes and does not constitute legal or tax advice. For specific advice applicable to your business, please contact a professional.
Business expenses, operating costs, operating expenses or operating budget — whatever you call the expenses you need to keep your business running, what matters most is how you identify and use that information. A recent survey by Innovation, Science and Economic Development Canada found that maintaining sufficient cash flow or managing debt are the most common obstacles to business growth.
But these obstacles can be avoided by understanding your business costs and using that insight to plan ahead. Here’s what all businesses need to understand about operating expenses and how to manage them.
What are operating expenses?
Operating expenses are expenses that a business owner incurs in order to operate that business. These expenses can include rent, inventory costs, administration fees or advertising expenses. They will typically fall into two categories: fixed costs or variable costs.
Fixed costs will remain consistent month over month and may include things such as rent or utilities. Variable costs can vary and may include things such as expenses from dining out or delivery costs. With so many different costs of doing business, it can be difficult to identify which are operating expenses.
The importance of identifying operating expenses
Unlike some other costs to your business, operating expenses are necessary to keep your doors open, so knowing and understanding these expenses can help you manage your cash flow. Looking at the relationship between your operating expenses and gross profit margins, for example, can signal whether you are pricing your goods and services efficiently. You can identify your operating expenses in several ways, including using software, working with a professional or listing them with a pen and paper.
Operating expenses impact on profitability
Identifying how much profit your business makes can inform the overall profitability of your business and when it could break even. Increases in operating expenses can lower profit and impact profitability. The sum of your expenses can help you better manage your business’s cash flow and what reinvestments you are able to make.
Role of operating expenses in financial analysis
Knowing your operating expenses, which is referred to as an operational expenditure (OPEX), can help you compare expenses to income and forecast your business’s profitability. You can see operating expenses summarized in an income or profit-and-loss statement. This can also help you make decisions about whether any operating costs need to be cut.
Examples of operating expenses
Operating costs for a business are related to day-to-day business activities. These can include a range of expenses, and can differ from industry to industry. Here are some examples to consider:
- Marketing and advertising expenses: Advertising, marketing and promotional event costs may be a part of promoting your business. Whether you purchase ads on social media or print a flier for an in-person event, these costs are part of your operating expenses.
- Rent and lease: office space, equipment leasing and rent
- Utilities: Electricity, water, sewage and gas costs are business expenses you need to keep your business operating. Internet and phone services are also part of this category.
- Office supplies: From stationary, printing or photocopying expenses to cleaning supplies like disinfectant, these are part of office supply costs. These can also include consumables such as paper cups, snack foods or first aid supplies.
- Labour costs: Employee salaries and wages, benefits such as health care or retirement and payroll taxes are all part of the operating expenses you need to support your business’s staff.
- Insurance costs: property insurance, liability insurance worker’s compensation insurance and more
- Maintenance and repairs: building maintenance, such as replacing shingles or tiles, as well as painting and equipment repairs
- Professional fees: costs for hiring service providers like accountants, lawyers or consultants.
Strategies to reduce operating expenses
Calculating your operating expenses can be critical to budgeting and forecasting how you allocate your funds. This could be in the form of cutting costs, such as by automating certain processes or reducing office supply expenses, or by investing in upgraded software to streamline or replace what previously required staff or multiple software to accomplish.
By monitoring and analyzing your expenses regularly, you can find ways to cut costs that aren’t necessary for your day-to-day business operations or that perhaps can be spread out at longer intervals.
