Operating expenses are those expenses that occur in day to day channelization of businesses excepting the major production part.
List of operating expenses
- Sales Commission
- Inventory Costs
- Transportation and Travel
- Employee Benefits
- Research and Development Funds
- Pension Contributions
- Amortization and Depreciation
- Taxes, etc.
Let us now dive deep into the world of these expenses and understand their key feature sets-
What are Operating Expenses?
For a business, there are so many important things that need to be done to make sure that there is a success in the end. However, in the process of doing these things, there are some expenses which are also a part of the business.
These expenses are known as operating expenses. Now you must be wondering what any overhead expense is. This article is going to explain everything in detail.
First thing first, these expenses are non-manufacturing expenses that are further categorized into-
- Selling Expenses
- Administrative Expenses
- General Expenses
Many times during the time of handling your business, you might have had to make some sort of investment in it. These are known as overhead expenses.
To be clear, an overhead expense of the business is something that the company or the business would bear to carry out the common and normal business operations to guarantee the success of the business.
There are so many different expenses for the business such as the inventory costs, rent, equipment, payroll, marketing, funds, insurance, and so much more. These are the expenses which are allocated to the development and the research processes.
These expenses are a very important part of the business, and you cannot deny that these expenses are some things that you have to pay as well.
The company, to make sure that growth and success are intact, will make sure that the reduction of these expenses takes place, and it is a very important responsibility for sure.
Also, the business needs to make sure that it is able to decrease the cost of the operating expense without actually deteriorating the popularity of the brand. Otherwise, the brand might lose when it comes to competing with rivals.
It is important for a business to strategize some plans which are going to be a great help when it comes to reducing these costs and expenses for the company.
However, before that happens, companies need to be familiar with the concept of operating expenses. This is what we are going to explain in the next part.
Understanding the Operating Expense
There is simply not a single speck of doubt about the fact that the operating expense is one of the most important things for the business and it is pretty much unavoidable too.
There are some firms which are able to reduce the expenses in normal operations and are able to have some sort of competitive advantage against rival companies and brands.
Also, with the reduction, they are able to increase the earnings for the business in the best way. But then, when it comes to the reduction of operating expenses, then it can have some negative impact as well if proper attention is not being paid to the strategy.
If the reduction is not made in a proper and effective manner, then the company might have to compromise the quality and integrity of the operations.
This can result in decreased sales, and that is certainly not good news for the company. So, the best thing to do in such a case is to find out the perfect balance that one needs to have in order to get significant rewards for their company.
This can be a bit of a difficulty in the beginning, but with the proper strategy and assistance, a company will be able to achieve this goal in the best.
One of the important things to remember about the Internal Revenue Service is that it provides a certain way to the companies by which they will be able to deduct some of their operating expenses after making sure that there are some profits for the business as well.
So, there is no doubt that the companies now have a respite from the overbearing expenses that take place during these normal and yet compulsory expenses.
How Does It Work?
In order to completely understand the concept of operating expenses, it is really important to make sure that you have a complete understanding of the process in the first place. How are you going to get that? In order to do that, you need to know how these expenses work.
The operating expenses are the certain costs which are associated with the running of the business and the core operations which are used on a daily basis for the success of the company.
There are some common examples, such as labour costs and inventory costs, which can explain the concept of operating expenses in the best way.
The operating expenses actually exclude the interest expenses, accounting adjustments, transactions, legal judgments, and some of the other statements that are not really in direct relation with the business operations which form the core business.
Importance of Operating Expenses
Now the most important question on the mind of the readers would be why these operating expenses are so important for a company?
With the help of the operating expenses, one will be able to calculate the operating incomes, and that is certainly one of the most important and crucial factors which will be able to measure the growth and success of the company in the best way.
With the lowering of these operating expenses, there will be more and more profit for the company. So, who wouldn’t want to have some profit for their company, right?
This is one of the main reasons why companies from all over the world give so much importance to these operating expenses in the best way.
There are many different things which will be able to affect the operating expenses of a company. Pricing strategy is one of the main components.
Also, the labour costs and the raw material price are some other factors which can affect the operating expenses too. We all know that these are some of the important decisions that the managers have to make in the best way for the company.
So, there is no doubt that these measures of the finance of a company are going to decide the managing ability of the company as well. Not just that but it is going to have an effect on the competency of the company too.
Another one of the most important things that you might have to note is that there are some other industries and companies where the operating costs will be a bit higher than the others.
So, it is important to make sure that the operating expenses of these companies are compared in an effective manner to make sure that they are able to understand the business and what they have to do in order to reduce their operating expenses.
With the help of that, the companies will be able to make sure that they can guarantee more and more profit in the future.
Different Types Of Operating Expenses
When it comes to operating expenses, there are many different types. It is important to categorize them into groups to have more understanding of these expenses. So, here are some of the different types of expenses that the company has to bear for normal operations.
#1. Fixed Expenses
These expenses are the ones in which there is no control of the company as there is a legal obligation for the company to bear these expenses. Some of the common examples of fixed expenses are the mortgage of the company or the rent.
There are some other expenses, such as the business loans that the company has to take from the bank in order to carry out some of the operations. The company has to pay these expenses no matter what happens if it wants to avoid legal complications in the future.
#2. Periodic Expenses
These expenses are the ones like the fixed expenses, and there is no control of the company over these as well. These are the expenses that have a fixed date of recurring, and the company has to make the payment at that time.
The perfect examples of these expenses are the labour costs and the salaries of the employees. When the date of the payment arrives, it is the duty of the company to bear these expenses to avoid the consequences which might occur if they fail to do so.
Bills that the business has to pay in order to operate properly are also a very good example of periodic expenses.
#3. Variable Expenses
The variable or the discretionary expenses are the third types, and these can be a bit challenging for sure, but there is a control that the company will have on these expenses.
The companies will be able to reduce these expenses with the behaviour that they have in the company. The clothing, entertainment, and food expenses are some of the common examples right here. In order to reduce these expenses, the companies need to have a proper strategy in hand.
Examples of Operating Expenses
Now, in this section of the post, we will be discussing the operating expenses of different fields such as marketing, compensation, etc.-
#1. Sales and Marketing expenses
- Advertising costs
- Travel costs
- Direct mailing costs
- Sales material costs (such as brochures)
- Entertainment costs
#2. Expenses Related to Offices
- Utility costs
- Accounting expenditures
- Property taxes
- Depreciation of fixed assets assigned to non-production areas
- Legal fees
- Office supplies
- Insurance costs
- Repair costs for non-production facilities
- Rent costs for non-production facilities
#3. Operating Expenses Related to Compensations
- Compensations and associated Payroll Taxes
- Benefits for the nonproduction employees
- Sales Commission
- Contributions to the Pension Plan for Non-Production Employees
#4. Operating Expenses including Cost of Goods Sold
- Freight in and freight out
- Rent of production facilities
- Direct materials
- Benefits for production personnel
- Direct labour
- Depreciation of production equipment and facilities
- Compensation for production personnel
- Utility costs for production facilities
- Repair of production equipment and facilities
- Property taxes on production facilities
Operating Expense wrap up!
This is all we have for you today about the operating expenses. We hope this article was informative for your business.
What do you consider the Operating Expenses of your business?
Did we miss any of these expenses that you are bearing? Share with us in the comments below.