May 21, 2021

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Operating Expenses Explanation with Examples

Operating Expenses Explanation with Examples

One of the important parts of accounting is the company’s income and expenses. It is the nature, conditions of performance, and the direction of work of a particular organization that affect the division of funds into -income and expenses.

Definition

Operating expenses, also known as unavoidable expenses, are expenses that the company has to incur for the smooth running of its day-to-day business activities. These are the costs of doing business beyond the costs of goods sold and don’t relate to the production of a product. Oftentimes, the term operating expenses is abbreviated to OPEX. These expenses are recorded in an entity’s Income statement during the period that they have occurred rather than when the company paid.

Operating Expenses Explanation with Examples

Operating expenses can be classified as follows:

  • The fixed operating costs, for example, of an online store do not depend on the volume of sales of goods and are constant over a certain period of time. For example, renting an office and warehouse is an ongoing operating expense. In the financial model, fixed operating costs are defined as a fixed amount.
  • The variable operating costs of an online store depend on the amount of total revenue from the sale of goods or the revenue of a particular product category. The variable operating costs of an online store in the financial model are defined as a percentage of the revenue of the store or product category. Variable operating costs include the cost of delivering the goods to the buyer, the cost of packaging the goods, payment system services, advertising costs, etc.

Example

An enterprise, for example, a pet store, incurs operating expenses in addition to expenses that are an integral part of the store’s main activity – the sale of pets and pet products. The store keeps track of operating expenses. Examples of such expenses for a store may include the following items:

  • rent
  • renovation of a building or equipment
  • salaries, wages and payroll taxes
  • shipping
  • employee benefits such as health insurance
  • expenses for accounting and legal support
  • property tax
  • utility costs
  • office supplies
  • advertising.

Operating expenses management

Operating costs can be much higher, depending on the type of business. Operating expenses can significantly increase overall costs, and the business owner needs to consider this before opening. Many people take them into account in the first place and immediately calculate the minimum income that the company must bring in order to stay in the black and turn into a profitable enterprise.

Operating Expenses Explanation with Examples

The business owner must look for ways to reduce operating costs in a way that does not directly impact the company’s operations. For example, operating costs can be reduced by reducing employee labor costs. For example, the number of salespeople can be reduced from five to four, which will lead to significant cost savings.

The disadvantage of this solution can be delays in customer service, and in some cases, security can be compromised due to a lack of staff looking after the sales area. As a result, the company will incur losses, and these losses may cancel out the cost savings that were achieved during the reduction.

When further reductions in operating costs may have a negative effect, you can alternatively try to increase profits. Going overboard in trying to save money on everything can negatively affect the company’s reputation, while a small increase in prices can be perceived as normal by customers if the quality of goods and services remains high.

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Author: Charles Lutwidge

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