Operating costs are an essential tool for your business's financial health. By understanding your operating costs, you will be able to manage your business more efficient way and also enable your business from becoming insolvent. You can save money and decrease overhead by eliminating unnecessary expenses. In this article, we define operating costs, explain why they're important, describe how they affect the business and share some examples of operating expenses.
Operating costs are the expenses incurred by a business that it uses to conduct its operations this includes costs associated with maintenance and administration of the day to day business. Operating costs are the most significant expense for any business. Understanding operating costs can help you make your business more efficient and increase profits.
Below are some examples of common operating costs for businesses:
• Salary and benefits
The wages or salaries a company pays its employees, including salary employees, hourly personnel and contractors, are operating costs. Operating costs also include the cost of benefits that a company pays to employees, such as health insurance, life insurance, paid time off or other benefits packages.
• Accounting and legal fees
• Bank charges
• Sales and marketing costs
• Travel expenses
• Entertainment costs
• Non-capitalized research and development expenses
• Office supplies costs
• Rent or lease payments
• Repair and maintenance costs
• Utility costs, the cost of electricity
• Raw materials
• Overhead costs
• Office expenses
Operating expenses are important because they help assess a company’s costs, reduce operating costs, and stock management efficiency. Essentially, they highlight the level of cost a company needs to make to generate revenue, which is ultimately the main goal of any business. When a business doesn’t successfully track its operating expenses, it can end up losing money on spending oversights. Diligent accounting of operating expenses keeps profits on growth for continued success.
Understanding operating costs can help you make your business more efficient and increase profits. Operating costs are calculated by adding up all the monthly expenses associated with running a business. These expenses can be divided into three categories: direct expenses (those directly related to providing goods or services), indirect expenses (those that aren't directly related to providing goods or services but are still necessary for a business to operate) and fixed expenses (those not directly related to providing goods or services but that remain constant regardless of how much revenue is brought in).
Below is the formula for calculating operating expenses:
Total operating costs = Cost of goods sold (COGS) + operating expenses (OPEX).