What Are Operating Expenses & why is it so important for SME Business Owners?
Operating Expenses often abbreviated as OPEX are expenses a business incurs through its normal business operations. In other words, a company usually acquire these to meet regular expenses to run a firm. They are the costs a company generates that don't tie to the product or services. This expenditure includes office expenses, accounting expenses, allowances, salaries and wages, utilities, rent, taxes, repairs, taxes and so on. Such expenses are essential for analysing a company's operational performance, which is important for financial measurement.
Why is it so important? What Does It Mean for My Business?
Investors will also be interested in the operating expense figures and operating expenses ratio. Operating expenses are necessary to run any business because it helps assess a company’s stock and cost management efficiently. It emphasises the degree of expenditures a business must spend to generate income which is the primary objective of all companies. If a company acquire higher OPEX as a percentage of sales compared to its competitors, that may indicate that they are less efficient at generating those sales. In other words, if it exceeds the company’s total revenue, the company will not make any profit. A high operational expenses ratio usually drives investors off, indicating that the company's cash flow management needs improvement.
Understanding Operating Expenses
When calculating a company’s operating expenses, it is essential to determine and separate between the operational activities or main revenue-producing activities. Doing this allows management to decide how to reduce operating expenses without affecting its strong ability to compete with its competitors in terms of quality or services.
The following are the most common operating expense that businesses incur:
- Insurance
- Utilities
- Salaries and Wages
- Property Taxes
- Maintenance and Repairs
- Legal Expenses
- Property Rent
Typically, the operating expenses mentioned above do not change regardless of business revenue. For example, if your company revenue goes up tremendously, your property rental or insurance cost isn’t going to change.
If a company wants to reduce operating expenses, looking for a cheaper property is another alternative to renting a space. In a critical situation, some companies consider downsizing their manpower or staff to compensate for the spending. Small business looking to grow tends to fall into the trap of hiring new staff too quickly, which can increase their operating expenses faster than it may grow the business revenue.
How do you calculate Operating Expenses?
Operating costs are different from one company to another. This is due to the nature of the businesses. Some companies have expenses that others don’t have to worry about. Remember that this is a general formula for calculating operating costs and may not apply to some of your businesses.
Example of Operating Expenses
Let’s take a Shoe warehouse company called GOShoe as an example for this calculation.
GOShoe manages to sell MYR 300,000 annually. Their Cost of Goods Sold includes leathers, sewing threads, and textiles synthetics minus all of the supplies that weren’t used, amounting to MYR 50,000. Operating costs amounting to MYR 6,000 in utilities, MYR 20,000 in salaries/wages, MYR 10,000 in rental fees, MYR 3,000 in depreciation of sewing machine, and MYR 3,000 for business insurance. If there are non–operating costs will make a net profit of MYR 154,000. (Refer to the calculation below)
300,000 MYR – 50,000 MYR (COGS) = 250,000 MYR (GROSS PROFIT) – 42,000 MYR (overhead) = MYR 208,000 (net profit)
Example:
How AutoCount can help?
With AutoCount Cloud Accounting, our software will help you records your operating expenses with a click of a button. You can also invite your freelance bookkeeper or accounting firm to record your operating expenses using AutoCount Cloud Accounting. Find out how AutoCount Cloud Accounting can help you with your business. https://ph.autocountsoft.com/cloud-acc.html#why