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Business expenses, operating costs, operating expenses, operating budget — whatever you call the expenses you need to keep your business running, what matters most is how you identify and leverage that information. A recent CB Insights report cites running out of cash or failing to raise new capital (38% of respondents) as the number one reason why businesses fail. Other issues included being outcompeted, flawed business models, and regulatory or legal challenges. Many of these obstacles can be avoided by understanding your business costs and using that insight to plan ahead.
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. These expenses 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 for your business.
The importance of identifying operating expenses
Unlike other costs to your business, operating expense 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 your 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, such as by using software, by working with a professional, or by listing them with a pen and paper.
Operating expenses and 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 be used to compare expenses to income and help you 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. They can also 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.
- 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.
- Labor 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
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, by reducing office supply, 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.