10 examples of operating costs in business (with definition)
By Indeed Editorial Team
Published 11 May 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Businesses might pay expenditures from the time they begin offering their services until they retire. Many of a company's basic demands make up the operating costs, which impact a company's financial performance. Understanding operational costs can help you improve your business's efficiency, generate profitability and gain a better understanding of the charges it incurs. In this article, we explain operating costs, explain why they are significant and provide some instances of a company's running costs.
What are operating costs in business?
Operating costs in business are expenses a corporation incurs as a result of its everyday operations, supplies and other required components. These are a company's most fundamental expenses and they serve as the foundation for its entire expense sheet and accounting. Businesses produce more realistic budgets and financial statements by calculating their operational costs. The running expenses are a mix of fixed costs and variable costs. Fixed expenses are costs that do not fluctuate on a regular basis, whereas variable costs are flexible.
Lease payments are an example of a fixed expense, whereas variable costs include salaries, electricity and even natural resources. Not all operational costs are either one or the other. If a corporation wishes to increase production to a greater level, it usually requires more raw materials and more people, but the main business site continues to function under the same lease.
The importance of operating costs
Operating expenses are essential for a variety of reasons, including:
Determining company value: Base expenditures are the materials, equipment, administrative requirements, maintenance requirements, buildings and other expenses that keep a company running. Determining these assists a firm in determining the worth of its core assets and the materials or equipment expenses it has.
Projecting budgets: When you know the operating costs of a business, you can identify reasonable budgets and pricing plans to earn sustainable income.
Attracting investors: If a business's running costs are low, investors tend to view it as a good investment. Low operational expenses have the ability to improve earnings and make a firm more appealing to investors.
Improving profit margins: When a company attempts to boost its profitability, it discovers that it's difficult to raise the prices of its products and services. Lowering operational expenses, on the other hand, is an option for enhancing profitability.
Enhancing stakeholder returns: Operating costs are the foundation of a company's spending or the cost of creating profits for shareholders and management. These expenses influence a company's financial performance and whether or not it provides a return on investment.
10 examples of operating costs in business
Below are some examples of regular business operational costs:
1. Advertising and marketing
A good way to attract more customers, attention and brand awareness is to invest in advertising and marketing. You can save money by concentrating on tactics that provide a high return on investment or that perform particularly well in your business. It takes some time to locate these people through trial and error, conversations with other entrepreneurs and research. Alternatively, if it means receiving a better rate and a bigger return, it's a good investment.
Related: 10 essential finance manager skills
2. Professional fees such as insurance, legal and licence fees
Though some businesspeople appreciate the concept of doing everything individually, there are several areas where inexperienced people might cause more harm than good. It's probably best to employ someone who understands what they're doing when it comes to matters of the law, finance or other difficult subjects. This entails paying a high hourly wage or a retainer charge.
Luckily, if you do some research, you could locate someone reasonably priced in each location that you rely on for excellent guidance. Begin by asking other local company owners who they use and their reason for doing so and then interview them to gain their opinions.
3. Office supplies
The recurring monthly expenditures of running a business might eat into your budget as well. Water, power, gas, Wi-Fi and basic office supplies such as pens, markers and paper are things you include in your budget. You could reduce utility expenditures by 'going green', installing more energy-efficient equipment and living in a smaller place. Also, impose stringent guidelines on when and how you use utilities, such as ensuring that all electronics are off and disconnected at the end of the evening. If you really want to cut office expenditures, you could decide to go digital and keep your office free from clutter.
4. Maintenance and repairs
If you own anything for the business, such as your own facility, machinery or personal electronics such as laptops, consider a budget for repairs and upkeep. Preventative maintenance and pre-emptive repairs are usually insignificant when compared to the expense of severe replacement and repair. Find a dependable contact in each area to conduct these basic duties.
This is your most consistent expense, aside from employee costs. If you bought a property outright, you probably make a mortgage payment and pay property taxes. If you rent, you most likely pay a set cost. Depending on your location, even a local company expects to pay several hundred pounds in rent every month. Keep your retail property modest and away from densely crowded regions or consider subleasing it.
Work with your landlord to improve the efficiency of the building. Rebidding vendor contracts, appealing property tax assessments and other cost-cutting measures can help you save money. While it's your landlord's responsibility to do this, collaborating with them can speed up the process.
6. Salaries and wages
Having a team of employees can help support the long-term success of a company. If you're just starting off, you start selecting who's going to be in your workforce and what tasks each person completes in their role. You determine the fair rate for each role you intend to recruit using a compensation index. Calculate the cost of the wages you intend to pay each member of your team to determine your operating costs for employee and contractor salaries.
This might range from nothing to thousands of pounds or more every year. Keep your prices reasonable by just hiring the employees you require to complete the work. In addition, engage independent freelancers and other part-time employees to address any gaps in your labour needs.
7. Vehicle expenses
If a company owns cars that need service, the cost of vehicle maintenance is an operational expense. Vehicles often require service multiple times each year for simple mechanical operation and safety. Thus, expenditures are likely to accumulate over time. For instance, if a tree removal firm has a fleet of eight trucks, the entire maintenance cost of keeping all the vehicles working makes up the business's operating costs.
8. Professional memberships
You're obliged to pay professional registration or association fees, depending on your profession. You pay a certain amount to become certified in a subject or you pay a monthly fee to be a member of a register or database. Fees range from small to expensive. Unfortunately, unless you plan to work outside of those standards and group activities, there isn't much you're able to do to decrease those expenses.
9. Travel, entertainment and dining
If your business requires you to travel across the country to meet clients, pitch your business or recruit outstanding individuals, you incur large expenditures in the transport, food and entertainment area. You pay for trips you take yourself or for your staff's trips when they travel to distant areas, take customers out to eat or even conduct business at sporting events. You could cut back on expensive client meals by replacing some in-person meetings with video chats.
It's worthwhile if it saves you hundreds of pounds every month. This is greatly dependent on your sector and how much money your company is able to spend.
10. Other losses
Consider litigation, natural catastrophes and unexpected events that might disrupt your revenue stream. There are several forms of company insurance. Get any coverage that safeguards your company from a real threat. You may, on the other hand, lower your rates by purchasing your insurance from the same provider and adhering to safer ongoing habits. Also consider the possibility that your office can become a target for thieves, including cyber-attacks.
A single hacked password could have a negative impact on your business. It's advisable to make investments to improve security measures. Modern camera systems are quite affordable and preserving your digital presence can be as simple as properly educating your personnel and keeping their software updated.
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