Operating expenses for small businesses explained

Keeping track of your expenses is one of the most fundamentally important roles of any business owner. Without that crucial knowledge, you’re likely to make uninformed decisions that could have a devastating impact on your bottom line.

But just as important as keeping track of your expenses is understanding the various types of production and operating expenses. Operating expenses typically make up between 60% and 80% of overall business expenses, so it’s important to know not only what they are but why and how they function the way they do.

What are operating expenses?

Any of the expenses incurred by your business that are not directly related to the goods or services you produce can be referred to as operating expenses. They are literally the costs of running a business and include everything from rent and utilities to postage costs and taxes.

Let’s look at a good example – a small retail shop that creates its own products. All staff members involved in the actual creation of the product are part of the manufacturing process, whereas the wages and benefits of the staff who run the shop would be considered operating expenses. Note that the shop requires electricity and heating for the premises, and the owners are most likely paying rent for the space too. These expenses also fall under operating costs.

Why are operating expenses important?

All types of costs are accounted for differently as they each reflect their part in how successful a business is and how efficiently it’s being run. Generally speaking, it is the goal of all businesses to keep operating costs to an absolute minimum, as profits increase when operating costs decrease and revenue increases. 

Of course, it’s rarely that simple. Cutting operating costs too deeply can result in reduced productivity, which will hurt the bottom line in the long run. For example, if a company were to cut its marketing costs and reduce the number of sales staff it employs, it would see a profit increase in the short term, but the business is likely to suffer in the long term.

Examples of operating expenses

While operating costs are likely to be divided into several categories on an income statement, the costs below could all be described as typical operating costs.

• Wages for all staff members not directly involved in manufacturing

• Payroll taxes

• Employee benefits

• Rent and utilities

• Advertising/marketing costs

Income statements and operating expenses

Operating expenses are a very important figure on the income statement. The net income is reached by subtracting the operating expenses from revenue and this figure can be used to give investors a valuable overview of the business and help business owners make informed decisions.

Without monitoring your operating costs, you’re only getting a part of the full picture when it comes to your true profitability. After all, it’s quite possible for a company to lose more through operating costs than it’s making through revenue. By using operating expenses to create a more rounded view of your finances, you should be able to decipher where you’re overspending and make cuts accordingly.

It would be almost impossible to understand your business and run it sustainably without knowing your operating expenses. It’s also something that can be quite confidently tracked and organised using decent accounting software.

We can help

If you’re interested in finding out more about operating costs, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.