Operating expenses, also known as OPEX, refer to the expenditures that businesses incur from facilitating operations. Companies must know what their operating expenses are to understand how their resources are being allocated.
Analyzing a company’s operating expenses also provides business owners a way to get a clearer view of their cost drivers. From this, they’d be able to learn how to best optimize their management efficiency.
What Do Operating Expenses Include?
Business owners or managers usually consider the following when calculating their operating expenses:
- Office or store rent
- Inventory costs
- Company insurance
- Marketing costs
- Travel expenses
- Utilities payments
- Payroll for staff
- Research and development costs
- Miscellaneous costs
When seeking to cut costs and maximize company earnings, each of these factors must be evaluated. Business leaders should carefully determine where expense reduction can be applied without inhibiting the quality of business output or hampering the efficiency of operations.
Is It the Same As Capital Expenditures?
Operating expenses must be differentiated from another type of expense that businesses encounter: capital expenditures. Capital expenditures and operating expenses are regarded differently in accounting.
Capital expenditures, also known as CAPEX, include company purchases for assets meant for long-term use. These assets can be items used to carry out everyday business operations. For example, the spend on machinery and equipment for manufacturing is considered part of capital expenditures because it’s typically only made once or every few years but is a vital part of operations. However, the costs incurred in maintaining and repairing equipment fall under operating expenses.
How Are Operating Expenses Classified?
Managers tend to classify operating expenses into two types: fixed costs and variable costs.
Fixed costs are constant. They remain the same throughout the company’s production. Examples of fixed costs include office rent, insurance payments, and payroll for the company’s regularized staff. This also includes the depreciation of a company’s equipment.
Variable costs differ depending on a number of factors. For instance, monthly production costs that are reliant on the amount of products a company needs to produce every month may vary. Raw materials, commissions from sales, shipping charges, and advertising costs fall under variable costs.
Sometimes, the same factor can fall under both fixed and variable costs. For example, the salary for regular employees may be considered as a fixed cost, while the salary for contractual or project-based employees may differ every month.
How Are Operating Expenses Tracked?
A tool known as an income statement monitors both the income and expenses of a company. By tracking these, managers are able to see how profitable the company is. Expenses are commonly categorized into six groups:
- Operating expenses
- Administrative costs
- Costs of the goods sold
- Income taxes
These are all considered as operating expenses. However, income statements tend to exclude the expenses incurred for income taxes.
Businesses also incur non-operating expenses, which are not related to the company’s core operations. These typically cover interest and other similar costs. Sometimes, a company’s managers or accountants do not include these in their examination of business expenses.
What’s the Importance of Operating Expenses?
Operating expenses must be carefully analyzed to see how to avoid overspending on a business aspect and how to streamline operations in order to maximize profit potential. Companies can use it as a reference to assess its performance over the years and how much more efficiently they operate compared to their competitors.