What are operating expenses in business? (With examples)

By Indeed Editorial Team

Published 13 July 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.

Managing operational expenditures effectively remains a vital component of managing a business. Operating costs also remain critical to maintaining a company's financial statements in order. It's important for business owners and anyone wanting a career in operations to understand what operational expenditures are and how to manage them appropriately. In this article, we define operational expenses, explain what they signify on a balance sheet and how to categorise them using examples.

What are operating expenses?

The phrase operating expenses refers to the continuing costs that a company incurs as a result of its routine operations. These costs are directly related to the manufacturing of the products or services that a company offers. You can categorise operating expenditures as liabilities on a company's balance sheet and refer to them as selling or administrative expenses. Employee pay, structures and utilities, tools, supplies, equipment and marketing expenditures are examples of such expenses.

While operational expenditures remain inescapable for a business, it's nevertheless critical to properly manage the company's budget to reduce operating costs, increase earnings and compete with other companies in the sector.

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The importance of expenses for operations

These costs are necessary for determining operational income, which remains a critical financial measure. You can determine the expenses of business operations by looking at a variety of factors, including both pricing strategy and general management. A detailed examination of operational expenditures provides insight into a company's managerial flexibility and competence. Certain sectors have higher operational costs than others, so comparing operational expenses with companies in the same industry proves more helpful.

Operating vs non-operating

A non-operating expense refers to an expense incurred by a company that's unrelated to its primary activities. Interest costs, lending rates or losses on asset disposition make up the most prevalent forms of non-operating expenditures. Accountants ignore the impact of finance and other irrelevant concerns when examining the performance of a corporation by excluding non-operating expenses.

Types of expenses for operating

While a company incurs a variety of expenditures as a result of its activities, operational expenses are generally divided into three categories: compensation-related expenses, sales and marketing-related expenses and office or workplace-related expenses. Each cost incurred by a company remains on the balance sheet in accordance with these categories and the purpose of the charge. Below are the three types of expenses in detail:

Compensation-related expenses

Compensation-related operational expenses include all costs incurred by a company as a result of employee pay or benefits packages. Since companies usually pay employees on a biweekly basis, compensation-related expenditures typically appear higher and occur more often for most organisations. Examples of costs that remain closely tied to compensation include bonuses and commissions.

Sales and marketing-related expenses

The expenditures connected with promoting a company to the general public and selling their products or services in the market make up sales and marketing-related operational expenses. These expenditures include costs related to marketing to private consumers such as shareholders, advertisers and the company's board members. The costs of other non-advertising public relations concerns may also fall into this category.

Office or workplace-related expenses

You can classify any expenditures linked with a company's capacity to manage its workplace or offices as office-related operational expenses. Standard office supplies make up one of the most well-known office-related expenditures. Despite the fact that these products aren't directly used to make a product or offer a service, they enable the company's employees to do so and offer advantages to all aspects of a company's operations.

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Examples of expenses for operations

Operating costs include expenses that don't directly relate to the raw materials used to manufacture the products or services offered by a company. Often, accountants abbreviate these as OPEX. Examples include:

  • Payroll: This defines payroll expenditures for personnel who aren't directly involved in the manufacturing of goods or the provision of services to consumers, including leadership pay and compensation for departments such as human resources. Benefits, such as company payments to employee pension plans, are also included.

  • Research and development: This comprises all costs and expenditures for things like product design and improvement, in addition to new product development. The research and development budget includes all salaries paid to staff working on new projects or tasks.

  • Office supplies: This can include expenses related to running a business, such as rent and office supplies.

  • Sales and marketing expenditures: These expenses relate to promoting a company and its products. This covers expenses such as media purchasing and sales commissions.

How to reduce expenses

By lowering your running costs, you're able to stay ahead of the competition. It's important for small company owners and accountants to constantly look for methods to cut costs without compromising the quality of their products or services. As an accountant, take the following steps to reduce operating business expenses:

1. Automate time-consuming tasks

There are plenty of Internet tools and software packages that can help a small business streamline and simplify its day-to-day operations. This software handles finance, website hosting, marketing messages, wages and other responsibilities. Technology is beneficial because it increases productivity. Productivity leads to a reduction in operational expenses in areas like direct labour. Bots and computer programmes perform tasks quicker and with fewer mistakes than people. Technology also helps enhance supply chain procedures, such as lowering the cost of delivering raw commodities.

2. Outsource certain tasks

If automation isn't possible, another alternative for increasing efficiency includes hiring an outside professional to do the task for you. Areas that appear to profit the most from outsourcing include marketing, advertising and accounting. Managing an in-house marketing strategy becomes a distraction for many managers who remain focused on their primary business. Although the time they spend on marketing can sometimes pay off, they may prefer to assign it to someone else for efficiency purposes. While hiring an outside supplier may seem more expensive, assigning certain duties to outside experts can save you money in the long term.

3. Go paperless

Another method to save operational expenses includes going paperless. Many offices and workplaces waste a significant amount of paper on a daily basis due to human error and inefficiency. The cost of printing anything from internal papers to catalogues and flyers adds to your company's expenses. If you're in a managerial purpose, you can slowly introduce a paperless strategy and encourage staff to print papers only when they're absolutely essential. Accountants may wish to pitch such a strategy. If a project requires some printing, order a small quantity to ensure none are wasted.

4. Become eco-friendly

Consider replacing normal light bulbs with compact fluorescent lights to save energy. You can also improve your insulation and windows to save money on heating and cooling. Try to limit the amount of refuse you produce. If your office contains multiple unused workstations, disconnect the equipment in them to save money on power. Not only may you save money on utilities, but you also save money on your monthly office supply prices.

5. Reduce the travel budget

Many companies have already cut back on business travel, and this trend's likely to continue in the near future. The growing use of video conferencing ensures that businesses of all kinds can operate without someone driving or flying somewhere. Hotel bills, missed connections and rescheduling fees can mount up, making in-person sales presentations all the more expensive. Examine your company's travel budget to determine which in-person visits remain vital and which are more suitable for a virtual meeting. Reduced travel decreases operating costs and it's also beneficial for the environment.

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6. Close the office building

Leasing office space, paying energy costs and managing a physical workspace all put a strain on your budget. Over the past few years, thousands of businesses have chosen to close their office space and operate entirely from home. Businesses decrease their physical footprint and operational expenses by allowing employees to work from home. With today's technology, the difference between a person working two cubicles away and one working two cities away is practically indistinguishable. Employees often find working from home helpful since they save time and money not having to commute to the office each day.

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