Whether your company is large or small, you want to save money. Saving money as a business owner comes down to one simple principle—spending less than you earn. While you are likely already doing everything you can do to earn as much from your business, you may be able to cut costs by reducing operating expenses.
What Are Operating Expenses Anyway?
Operating expenses are one of a company’s main operating activities that are reported on the income statement. They “usually” include the cost of goods sold (for companies that sell a product), as well as SG&G (selling, general and administrative expenses). Essentially, it would include all of the costs necessary to keep the business running, such as payroll, rent, utilities, office supplies, marketing, taxes, insurance and other related expenditures.
How to Find Operating Expenses
The calculation for determining operating expenses is quite simple. It involves one simple calculation—addition.
First, calculate cost of goods sold. This is a common accounting equation which looks something like: Beginning Inventory + Inventory Purchases – End Inventory = Cost of Goods Sold.
Once you have calculated your cost of goods sold (COGS), all other costs involved with operating your business must be added together. It is important to remember that the calculation will be slightly different for each company since each company will have different expenses that go into the SG&G category.
If your accounting software chart of accounts and transaction coding is set up correctly this should be automatic. If you are deferring to a spreadsheet in Excel or Google Docs to complete this calculation you likely need a better system.
Tips to Streamline Spending
Ideally, you want your operating expenses to be as small as possible; to do this, you need to streamline your spending. For many businesses, cutting back on rent, insurance and utilities may not be a possibility.
However, what about payroll costs? While you have certain payroll expenses that are set in stone, others are flexible. Today, more than ever before, it is possible to outsource certain tasks (like bookkeeping or customer service for instance) and cut back on payroll in that area.
Another idea could be to implement an inventory management policy that can help make sure money isn’t “walking out the door” through the loss or misappropriation of inventory.
Finally, when purchasing anything for the business, take time to shop around—sometimes the vendor you’ve always used may not be the right solution for today’s market. However, your same long-term vendor may be happy to provide a discount or more services for the same investment. Just ask.
While understanding the concept of operating expenses may take a little time, once you grasp this part of finance, it can help you lower your spending for your business. Learn more about how understanding finance can help your business grow – click here to download our ebook.