What are Operating Expenses?
Operating Expenses Definition
Operating expenses, often known as operating expenditures or “opex,” are incurred by a business for its operational activities. In other words, they are the expenses incurred by a company to carry out its everyday activities.
Operating Expenses are expenses incurred by a business through normal operations such as rent, marketing, salaries, insurance, etc.
There are two types of operating expenses:
- Selling, General, and Admin Expenses (SG&A)
- Cost of Goods Sold (COGS)
Operating expenses do not include tax depreciation. SG&A provides marketing and research and development, whereas COGS includes staff salaries.
What is included in the operating expenses?
The following are examples of operating costs:
- Staff pay (excluding labor for manufacturing)
- License costs
- Promotion (including for social channels like LinkedIn)
- Accountancy charges
- Building upkeep and repairs
- office equipment
- Fees for attorneys
- Real estate taxes
- Vehicle costs
- Travel costs
The income statement of a corporation shows operating expenses.
What is not included in operating expenses?
Non-operating expenses are costs incurred by a company unrelated to its core operations. Non-operating expenses include the following items:
- Cost of interest
- Inventory costs that are no longer relevant
- Settlements in litigation
- Asset disposition losses
- Expenses for reorganizing
It’s helpful to isolate these items from the business’s results of operations. Because they aren’t part of the company’s main activities and may only occur seldom.
How to calculate operating expenses?
Calculate your operating expenses by adding your cost of goods sold (COGS) to achieve an operating expense ratio (OER). Then divide by your revenue to generate an operating expenditure ratio, a proportion of revenue spent on these expenses.
OER = COGS + OpEx / Revenue
You may now seek average operating expense ratios in your industry to see how your company stacks up.
The operating expense formula is essentially the total of various selling, general, and administrative (SG&A) expenses such as office staff wages, sales commissions, promotional and advertising costs, rental expenses, utilities, and so on. It is expressed mathematically as,
Salaries + Sales Commissions + Promotional & Advertising Costs + Rental Expense + Utilities = Operating Expense
On the other side, the formula for operating expenses is revenue minus operating income (EBIT) minus cost of goods sold (COGS). It is expressed mathematically as,
Operating Expense = Revenue – Operating Income – COGS
What are the ways to reduce operating expenses?
Spend less on insurance:
Look for package deals that cover numerous services (such as dentistry and vision) under one coverage.
Shop around with various insurance brokers to ensure you’re obtaining the best rates for your specific company needs. Keep in mind that brokers might earn commissions on insurance sales. Hence, they may not all be motivated to save you money.
Think about a four-day workweek:
While the psychological advantages of a four-day workweek are becoming more commonly recognized, there are also considerable financial advantages to working fewer hours.
Switching to a four-day week eliminates a percentage of variable overhead costs, saving thousands of dollars per year on things like power, office supplies, and even housekeeping.
It can also reduce perks like workplace meals, snacks, and even commuting expenses.
Use technology to your advantage:
Adopting technology can be inconvenient, and it may even cost money upfront. Still, it will save you money in the long term.
Your entire organization’s staff can benefit from online systems and software that increase efficiency and free up time.
Artificial intelligence (AI) can help handle data more quickly and reduce human error. Technology can also help improve communication inside your company and throughout the supply chain.
When it’s required, outsource:
Delegating or outsourcing tasks to specialists can save your running costs while raising your earnings.
Outsourcing advertising, marketing, financial advice, legal matters, and other areas to specialists can produce far more efficient results. At the same time, freeing up time to focus on significant growth.
You might also discover that hiring a full-time accountant or legal counsel is unnecessary. You can save money by outsourcing those tasks for fewer hours. While it isn’t always the best option, it is something to think about.
Shop around and begin negotiations:
Too many business owners discover years later that they have been overpaying for goods or services. Reduce the amount you pay for goods and services to save money quickly.
You may create a pipeline that includes receiving bids from various vendors for each project.
You will get a good deal if you negotiate for loyalty or exclusivity. And for purchasing in bulk or collaborating with other small businesses. Don’t be afraid to get innovative and look for fresh, cheaper alternatives.
Bad debt expenses are categorized as operating costs and usually get listed under selling, general, and administrative costs on your company’s income statement.
IT and accounting outsourcing are examples of ways to save operational costs in a firm. Because they allow you to acquire business-critical services without the payroll costs and other taxes. It would incur if these specialists were part of your regular workforce.