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A recent study found that companies spend upwards of $35,000 in the first year of business. That amount can teeter depending on your selected industry, but it’s safe to say that a good chunk of a business’s costs derive from operational expenses.
Operating expenses, or OpEx, are a large part of a business’s functionality. OpEx includes the cost of anything necessary for a company to conduct day-to-day tasks. There are several sub-categories of OpEx to become familiar with as your company grows in revenue and production.
Today, we will break down operating expenses and how to manage them efficiently.
What Are Operating Expenses?
Operating expenses are costs incurred by a business to keep day-to-day functions up and running and also include different sub-groups of expenses that are important to monitor
Operating expenses include:
- Rent/Mortgage
- Payroll
- Insurance
- Utilities
- Property Taxes
- Maintenance and repairs
- Advertising
- Office Supplies
Of these, equipment, payroll, incorporation fees, and insurance are usually the most significant chunk of the operating budget for companies in their first year.
It’s in the best interest of your company’s future to consider all OpEx costs before deciding how much cash you’ll need to get off the ground, especially if you are looking into pre-seed funding.
Types Of Operating Expenses
There are two subgroups of operating expenses: a fixed cost and a variable cost.
Fixed costs don’t change whether the company is operating or not and are typically the same month to month. Payments like rent and salaries require payment during temporary closures or non-operating periods.
Variable costs depend on the volume and production of goods sold. Machines that need repairs or replacements are a variable cost because their use correlates with production.
Keep reading here for more details on fixed and variable expenses (costs).
Other Business Expenses
There are other costs related to daily operations that occur in business records separately.
1. COGS (cost of goods sold) — COGS is on the other end of the operational spectrum. It includes the costs of raw materials and other necessities used to produce goods or services physically. OpEx covers everything else, so they are shown separately on the income statement.
COGS includes:
- Direct labor (applies to employees involved in product making, not all employees)
- Packaging
- Raw materials
- Products purchased for resale
2. Non-operating expenses — These types of expenses aren’t vital to business operations. This can include interest payments, inventory write-offs, settlement payments, or remodeling costs. Operating income covers non-operating expenses. Once deducted, the total amount of remaining operating income appears as the bottom line of your income statement.
The Importance Of Operating Expenses
Consistently balanced operating expenses equates to profitability. When a company’s operating costs are beneath revenue, the company is making money with the product or service. When expenses are higher than revenue, there is no profit made.
Operational expenses tend to rise during expansion or higher production volume to keep up with consumer demand. You should always celebrate a sharp increase in sales, but keep in mind the market doesn’t idle. The natural ups and downs will affect how much cost should be allotted towards operations to keep the company profitable.
How To Lower Operating Expenses
OpEx can look unfriendly to your startup budget at times, but there are ways to work around the cost without eliminating necessities.
1. Utilize social media for marketing and advertising. Social media platforms reach customers globally and are free unless you pay for ads.
2. Outsource. Instead of hiring an in-house team member, try an outsourced bookkeeping service or marketing firm.
3. Automate what you can — reconciling tasks, like employee payroll, that require multiple employees or teams to software saves money and time.
4. Pay bills early. Check with your vendors to see if they offer early invoice discounts.
Managing Operating Expenses Using Zeni
Operating expenses come with every business, whether you’re working from home or operating as a team out of a small office. Managing these expenses takes time and effort, especially when you can’t fully break down each cost until the month’s end. By the time traditional bookkeepers (in-house and outsourced) return finished books, production for the following month is in full swing.
At Zeni, we take waiting off the table. All of your accounts are updated daily to match real-time numbers when they happen. On your customizable dashboard, you’ll have a colorful breakdown of operational expenses that can expand into fully categorized brackets with the correlating cost. Compare up to 8 months of operating expenses side by side, or view expenses quarterly or yearly.
Here’s a preview:
Operating expenses are a core part of scaling your startup. Keep a keen eye on your expenses with our interactive dashboard. Schedule a demo with us below.
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