What Are Operating Expenses?
Operating expenses are all the costs your business incurs to run itself. These include everything from rent and utilities, to salaries, benefits, advertising, and stock purchase costs.
Operating expenses can vary widely depending on your business type and industry. For example, a service-oriented company like a law firm will have considerably higher operating costs than a manufacturing or retail company.
They can also vary greatly between departments within your business as well. For instance, if your marketing department is being paid competitively with other companies in your niche market niche market niche market , then you may not need to spend much money on this department’s operating expenses.
However, if that same marketing team is overpaid and does not come close to matching their peers on cost for their services; then you should reconsider how much money you are spending in this area.
Operating expenses refer to the costs that you incur in running your small business. They include the direct costs associated with operating a business, such as wages, utilities and maintenance, as well as indirect costs such as marketing and accounting.
To keep your business running efficiently, you need to know exactly how much it costs to maintain it. Operating expenses are important because they show you how much money is being spent for operational purposes.
If a particular cost isn’t necessary for running a stable and profitable business, then eliminate it. In this article we will explain operating expenses in detail so that you can get an idea of what they are and know how they can affect your business.
What are operating costs?
Operating costs are the costs that are associated with running your small business. These costs are the direct expenses such as salaries, utilities, and supplies.
As well, they include such indirect costs as marketing and accounting expenses. Direct costs are what you would expect them to be – the cost of an employee’s wages, benefits, taxes, and wages are direct costs.
Indirect costs are more difficult to predict and often, vary greatly from one business to another. Indirect costs can include things like rent, insurance, utilities, depreciation, and delivery and inventory costs.
Why is it important to estimate operating expenses?
You need to know exactly how much your business costs in order to keep it running efficiently. If a particular cost isn’t necessary for running a stable and profitable business, then eliminate it.
For example, if you have employees, then there is a certain amount that goes toward their wages. However, you don’t have to have an office with them working at desks. You could be on the road meeting with clients.
That doesn’t mean that you should try to save money on their wages, but you should look at what they are currently costing you. You can also estimate expenses based on your past experiences.
For example, if you have a history of buying office supplies every month, estimating how much it will cost to replenish those supplies gives you a good idea of how much money you are spending on non-essentials.
Types of Operating Costs
– Direct Expenses – Wages – The cost of employees, including wages, benefits, and taxes.
– Benefits – Health insurance, vacation, and retirement plans.
– Taxes – FICA, Medicare, and Federal Unemployment taxes.
– Training – In-house training, conferences and workshops.
– Perks – Health clubs, parking, massages, etc.
– Office Supplies – Paper, pens, ink, etc.
– Other Expenses – Office supplies, furniture, cleaners, etc. Indirect Expenses
– Sales Training – Sales training for employees, as well as for yourself.
– Sales – Marketing and advertising, as well as sales commissions.
– R&D – Research and development, as well as salaries for non-manufacturing staff.
– Facilities – Rent, utilities, and maintenance
– Depreciation – The estimated write off of your building, equipment and inventory over a period of time.
– Debt Service – Interest on the debt used to buy your business. – Other Expenses – Training, HR, IT, accounting, etc.
How to calculate operating expenses for a small business?
Start by taking a good look at your business. What costs do you incur regularly? Then, break these down by category. There is no need to get every single expense correct, just make an attempt to estimate them as closely as you can.
Once you have figured out where your money is going, you can make a more informed estimate for how much it will cost to run your business. Start by looking at the following table, which will help you figure out the general amounts for each cost category. Then, you can take that number and apply it to your specific business.
Tips for estimating operating expenses for your small business
– Calculate your break even point. – Try to get a feel for how much things cost in your area. That way, you can have an idea of the general amounts for your business.
– Get as much information as possible to help you estimate operating expenses. – Get help from your accountant, banker, and other financial advisors. They can give you an idea of the general amounts for your business and the specific ones that are included in your industry.
– Be aware that you might not be able to get exact figures due to rounding. Try to keep that in mind when you are making your estimates.
– Compare your estimates to those of a reliable third party. It can help to have a third party verify the accuracy of your operating expenses.
– Take your time and make sure that your estimates are accurate. It is better to be slightly low than high.
– Remember that operating expenses are not the same as profit. Having an accurate estimate of operating expenses will help you to keep your business running smoothly and efficiently. That way you can take more time to focus on generating revenue.
Conclusion
Operating expenses are the costs associated with running your small business. They include direct expenses such as wages, benefits, taxes and utilities, as well as indirect costs such as marketing, depreciation, and debt service.
Operating expenses are important because they show how much money is being spent on operational purposes. If a particular cost isn’t necessary for running a stable and profitable business, then eliminate it.
