Operating expenses are the costs to a firm of activities not connected directly with the primary activity of the business. They are the expense of carrying on the day-to-day activities that do not involve production or sales.
How do operating expenses work in a business?
A business, for example a grocery store, incurs operating expenses distinct from those involved in the primary activity of the store, which is selling groceries. The store keeps an account of their operating expenses and the list may include such items as:
- Repairs to a building or equipment
- Travel costs
- Pension contributions
- Employee benefits such as health insurance
- Accountancy and legal fees
- Property taxes
- Utility costs
- Office supplies
There may be more such expenses depending on the nature of the store’s business. Operating costs may add up to a hefty total and the storeowner should consider all operating expenses before going into business. Many people consider them as costs to the store before even opening the doors and indicate the minimum income the store will need to generate in becoming a viable business.
Managing operating costs of a business
All operating costs will need paying, regardless of whether the store is open or closed. The storeowner must also budget for when a store closes over holidays or in the event of an emergency such as a fire or flood. The storeowner will also have to consider how to reduce the operating costs of the store without impacting directly on the smooth running of the business.
A storeowner may look to reduce operating costs by cutting down on payroll, say cutting sales staff from five to four, with the direct result of substantial reduction in salary costs.
A downside to this is that there will be less people selling, delays in helping customers or even a need to increase security with fewer eyes on the store sales area. The store may lose business as a result and sometimes the loss may outstrip the initial savings of reducing the payroll bill.
With there being a limit on the cutting of operating costs before feeling a negative effect, the store may consider trying to increase revenue as an alternative.
Reducing the bottom line of costs may affect the good name of the store while a small increase in prices may be understandable if the quality of goods in store stay the same.
Operating Expenses FAQ
What is operating expenses examples?
- Professional services
- Maintenance and repairs
- Interest expenses
What are the 3 common categories of operating expenses?
- Selling, general and administrative expenses (SG&A): This category includes all of the expenses incurred in the day-to-day operations of a business, such as salaries, rent, office supplies, advertising, and professional services.
- Cost of goods sold (COGS): This category includes all of the expenses associated with producing or purchasing the products or services that are sold by a business. Examples include raw materials, labor costs, and transportation costs.
- Depreciation and amortization: This category includes the costs associated with the loss of value of a company’s assets over time. Examples include the depreciation of machinery and buildings, as well as the amortization of intangible assets such as trademarks, copyrights, and patents.