What are Operating Expenses?

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Every business spends in doing a regular business operation and the expenses incurred are called an operating expense. The operating expenses or OPEX include payroll for staff, rent, maintenance and repairs, marketing, insurance, attorney fees, and funds that are used up for studies and invention. These are costs that are generated by the business but not related to the production or of the products. It is made to keep the business running smoothly.

Operating expenses are a necessity for every business and they are not something that can be avoided. Some businesses try to lessen these expenses by reducing costs in their operations. However, to lower the operational expenditures will also mean compromising the standard of operations. Besides that, the operating expenses are monitored by the Internal Revenue Service (IRS) hence they have the say whether to allow the business to operate with adjusted expenses operating. IRS mostly determined through capital expenditures.

What are the operating expenses examples?

Operating expense is incurred by the business to make its operations keep running. It does not include however the costs in manufacturing the goods or services sold. Examples of operating expenses include the following:

Compensation-related operational costing examples:

  • Compensation or payroll tax on staff(non-production) wages
  • Sales commissions
  • Benefits for staff(non-production employees)
  • Contributions for non-production employees’ pension plan
  • Office operations
  • Benefits for non-production employees
  • Pension plan contributions for non-production employees

Office-related operating expenses examples:

  • Accounting costs
  • A decrease in fixed assets for non-production areas
  • Insurance costs
  • Fees for legal transaction/operation
  • Office supplies
  • Property taxes
  • Rental fees for non-production facilities
  • Repair fees for non-production facilities
  • Utility costs

Sales and marketing-related operating expenses

  • Advertising costs
  • Direct mailing costs
  • Entertainment costs
  • Sales material costs (such as brochures and fliers)
  • Travel costs

If the finance-related costs are not generated by the ongoing operations, sometimes they are not considered as operating costing. But if they are included, these will be the auditor fees, bank fees, debt placement costs and interest fees.

Other operational costs sometimes are expanded to include every operational feature of a company which means they also consist of the cost of goods sold. Operating expenses include the following.

  • Freight in and freight out
  • Direct materials
  • Direct labor
  • Rent of production facilities
  • Compensation for production personnel
  • Benefits for production personnel
  • Depreciation of production equipment and facilities
  • Repair of production equipment and facilities
  • Utility costs for production facilities
  • Property taxes on production facilities

Operating Expenses on Income Statements

The income statement is a summary of the firm’s income and expenditures over a certain duration to identify and visualize the profitability of the business. There are 6 categories of income statements and these are the cost of goods sold; sales, admin costs, amortization, and other operation expenditures, interest and income taxes. Looking at this list, these can be considered operational expenditures but of course considering some grounds. However, if it is identifying the operational income, interest costs and income taxes are not included when using the income statement.

Different Types of Operating Expenses and How to find it?

Every company’s operating budget depends on its industry and business setup. Finding it is to look for expenses that don’t directly impact the production of the goods or services sold. The income statement is the best way to find it.

However, not all businesses have income statements or they don’t have separate data for expenses and cost of goods sold. You can check your general ledger and find the expense report and look for recurring costs that do not directly impact the labor and materials of goods. The total of those expenses is the operational expenditures of the business.

There are different types of operating cost but they are usually related to non-production costs such as compensation, sales, and marketing costs and office supplies. These are the most common expenses, and contributions for pension plans, sales commissions and non-production staff wages such as freelancer pay or fees for the repair of non-production facilities, fall under the compensation costs.

Sales and marketing is the department that most companies are concerned about because sometimes these costs ballooned due to executives who abuse their privileges. The accumulated costs include the costs of sales material, travel, direct mailings and entertainment for clients and prospective customers. For this reason, many companies have accountants to take charge of taking care of their expenditures especially in handling the firm’s credit card.

Other operational expenditures are not unpredicted expenditures, they are usually part of the budget plan for the year. They are accumulated from the regular office expenditures such as accounting expenses, insurance costs, property tax payments, utilities, repair and rental fees for non-production facilities, office supplies and legal fees.

Importance of Operating Expenses

For every company, increasing profit is the main goal. Reducing costs could be one of the best ways since if the business goes the other way like increasing the price of the product and service to increase the revenue. However, you will not be sure if customers will be willing to pay more. Decreasing the price of COGS, like using cheaper labor or materials but the quality may be compromised and may lead to business loss.

Operating expenses don’t directly affect the price or quality. So controlling it can increase the profit but you have to make sure that it wouldn’t affect the quality of the product.

What Does an Increase in Operating Expenses Mean?

Cutting down the expenses means saving money to increase the revenue but if there is an increase in operating expenses it implies that there is less profit. The operational budget is oftentimes meticulously reviewed by the company as this type of cost has a low chance of being fixed than other agency expenditures like manufacturing costs, non-operating expenses, and capital expenses.

Cutting down on operating costs can be done through outsourcing areas of the business or letting existing staff work from home or even reducing salaries for new hires.

Conclusion

Business operations can’t keep running without spending. Operating expenses are incurred by a company that is not related to the production costs of the product or service that the firm offers. They come differently and far-ranging. Since it is something that a company cannot avoid, understanding about it is a must to increase the bottom line of your business. Also, organizing your income statement is one way to monitor the operating and non-operating expenses and gives you the chance to control them without harming the quality of the products sold.

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