When the economy begins to point towards a recession, the very first thing a savvy business owner should do is dive deeply into their operating expenses and start trimming the fat. 

Candidly, running a business during any economy – good or bad – requires a keen understanding of your operating expenses, their impact on your company’s financial well-being, and how to effectively manage them. 

Far too many SMB (small to medium size businesses) fail due to poor expense planning. So with that being said, if you’re reading this article you no longer have an excuse. It’s time to get a handle on your operating expenses, and to do this it’s critical you understand them deeply.  

That’s why we’re here today, because in this informative guide, we will explore the definition of operating expenses, provide examples of common operating expenses, emphasize the significance of tracking and controlling these expenses, and offer strategies for optimizing them. 

Whether you are a business owner seeking to enhance profitability or an aspiring entrepreneur aiming to establish a solid financial foundation, this comprehensive article will equip you with the knowledge necessary to navigate the realm of operating expenses and make sound financial decisions. 

Let’s get started!

What Exactly Are Operating Expenses?

Put simply, operating expenses are the costs of running your business. These are the costs required to ensure your business remains functional for the day-to-day operations. 

Often abbreviated as OpEx, operating expenses can include expense items like: 

• Utilities
• Salaries
• Rent/Lease
• Contractor Wages
• And more

These are going to be the broad buckets of the different operating expenses you’re probably incurring right now, and they can be broken down further into different expense items. Either way, these expenses are necessary to keep the business “operating”. 

It’s important to distinguish that operating expenses do not typically include any costs for processing or manufacturing a product or service (more on this below) and will often be different depending on the business you’re in.

Different Expenses To Pay Attention To

Operating expenses are going to account for a large percentage of your total expenditure. However, it’s important to understand a couple different expenses which shouldn’t be lumped in with OpEx. 

Non-Operating Expenses

These expenses are going to be tied to your financing and/or debt activities. For example, making payments on loans and credit card bills will be included as an expense, but not operating expense. 

Cost Of Goods Sold (COGS)

Remember how we mentioned the exact costs of manufacturing a product or service doesn’t count as an operating expense? Well, that’s because it gets bucketed into the cost of goods sold (COGS). This expense item is the direct costs it takes to manufacture and produce a product or service. 

Capital Expenses

Often referred to as CapEx, this expense item is considered a one-time purchase which lasts more than 1 year and doesn’t normally get shown on your business’s income statement, but will be reflected on the balance sheet. Some examples of CapEx include:  

• Buildings
• Furniture
• Patents
• Equipment
• Software

3 Different Buckets Of Operating Expenses

Generally speaking, you’ll find your OpEx will break down into 3 primary buckets.  

Fixed Operating Expenses

These are going to be costs which are consistent and predictable. An example of a fixed operating expense would be your business’s rent or building payment.

Variable Operating Expenses

These expenses are going to swing based on the operations of the business itself. Variable costs will fluctuate from month to month and will often account for the largest expense bucket within your business. A couple examples could be sales commissions, utilities, overtime, third party contractors, etc. 

Periodic Expenses

Often periodic expenses can be lumped in with CapEx, but sometimes it’s an operating expense which isn’t quite as frequent as variable OpEx. A good example of periodic expenses would be the cost for hiring a contractor to fix a piece of equipment. 

Operating Expense Examples

As mentioned earlier, operating expenses are fairly diverse depending on the industry you’re in. Here are some broad examples of OpEx… 

Personnel Expenses

Not to be confused with “personal” expenses… This category will include the costs associated with your employees or workforce which can include expenses like: 

• Salaries – the amount paid to employees for work (excluding labor for manufacturing)
• Benefits – which include healthcare plans, retirement plans, and other perks
• Payroll Taxes – these are the employer taxes required like Social Security and Medicare
• Wages – generally used for contractors or hourly workers
• Travel – for yourself or employees who travel on behalf of work activities

Office Expenses

This category will be the expenses required to cover the costs of the office and general administration of running the business. Items can include:  

• Rent – the amount you’re paying to lease a space or rent a location
• Utilities – these will be the expenses for water, gas, electricity, internet, phone, waste, and other utilities required to run your business
• Property Taxes – the taxes you must pay for the property you’re renting, leasing, or own.
• Office Supplies – for items like paper, equipment, and other supplies necessary for the day to day operations
• Insurance – the premiums paid to provide protection against risk of running the business – for example general contracting insurance for roofing businesses

Marketing and Advertising Expenses

This category will be used for all the costs incurred in promoting your business. This has a tendency to be the most variable within the OpEx budget, but will produce the greatest return on investment for a business. The include items like: 

• Advertising Campaigns – any expenses related to advertising for your brand which include search engine optimization, pay-per-click advertising, printed flyers, television and radio commercials, and more 
• Marketing Materials – this might include brochures, business cards, banners, tradeshow signs, and other marketing items
• Sales Commissions – this expense item will be for sales people who are rewarded a commission for making a sale on your companies behalf

Research and Development Expenses

These costs will be derived from the process of innovating a product or service. Sometimes R&D is lumped in with COGS, but most often this expense item should be added to OpEx. They can include items like: 

• Scientific Research – expenses for conducting research studies and experiments
• Prototype Testing – costs involved in testing and refining prototypes before launching a new product

Why Managing Your Operating Expenses Are Critical To Your Businesses Success

Hopefully the examples above provide some insight into the different categories of expenses within your business. 

If you’ve been running your company for a while, you’re probably already very aware of these different expense items, but if you’re new then this will be a good crash course. 

Why does all of this matter though? 

Because your operating expenses have a direct impact on your bottom line…

AKA your profitability.

A key challenge many small to medium size business owners struggle with is managing their expenses wisely.  

For example, did you know over 85% of telecom billing contains a significant overage or error within the bill? 

Or that you can negotiate your waste removal contracts? 

There are many ways to reduce your operating expenses within your business without impacting the quality of the service or product. In fact, we guarantee we can find you cost savings within your OpEx or you don’t pay a dime! 

Either way, you’ll at least learn a lot of ways to operate your business more efficiently, and effectively increase your profitability. 

Frequently Asked Questions

How Do You Calculate Operating Expenses?

Every organization will have different operating costs, but the general formula will be to calculate the different buckets above which would look like: 

Operating Expenses = Salaries + Benefits + Payroll Taxes + Wages + Travel + Rent + Utilities + Property Taxes + Office Supplies + Insurance + Advertising Campaigns + Marketing Materials + Sales Commissions

As you can see… that’s a lot of expenses. 

What Financial Statements Do Operating Expenses Appear On?

You will find OpEx on the income statement because it’s directly tied to the day to day operations of the business. 

Is Operating Expense Analysis Important?

Important would be an understatement. It’s critical you analyze the profitability of your business to spot trends, and potential problems before they even occur. Make sure to use expense experts – like Wolf Expense Solutions – to provide you with a thorough understanding of the different line items.