Running a business is rarely a straightforward endeavor, even in tasks that seem like they would be. Although some aspects of business are simple enough in theory, in practice, they involve more than you might think. For example, calculating your operating expenses seems more complicated when you take a closer look.
Thankfully, determining your operating expenses is still relatively straightforward, just not as much as you might initially believe. Some people may get confused about what is or isn’t an operating expense, and what to do with them. If you hope to run a successful business, though, you must be able to calculate these numbers.
Here’s a guide to help you calculate your operating expenses correctly.
Operating Expenses vs. Non-Operating Expenses
Firstly, you’ll need to know what does and doesn’t count as an operating expense. An operating expense, or OPEX, is a cost you acquire through typical business operations, but not production. These aren’t the things you need to make a product, but what it takes to sell it.
Non-operating expenses aren’t related to production either but aren’t tied to your core business. That includes things like depreciation, interest on loans and lawsuit settlements. While these also affect your bottom line, you don’t count them with your OPEXes.
Typically, non-operating expenses are things that you can’t predict or don’t happen regularly. As such, you can’t expect yourself to calculate those for future use or in regular budgeting. With OPEXes, on the other hand, you can measure them with reasonable accuracy and adjust your operations accordingly.
1. Identify Expenses
Now that you know what an OPEX is, you can start learning how to calculate them. The first step in this process is identifying all your operating expenses, which is also the most challenging part. Some costs are easy to track, but others are less clear.
What your OPEXes are varies depending on your type of business. No matter what you do, though, you can organize them into three general categories: fixed, variable and semi-variable.
Fixed costs are, as the name implies, expenses that remain constant over any period. These are things you always pay on and consistently pay the same amount for unless you change something. No matter how much you’re producing or selling, fixed costs remain the same.
Typical fixed costs include things like:
- Salaries of non-production employees
- Rent or mortgages
- Property taxes
- Loan payments
- Advertising and marketing
As you might’ve guessed, variable costs don’t remain constant. These change depending on any number of different variables. For example, if you run a trucking company, fuel is a considerable variable cost, varying depending on your mileage, fuel efficiency and gas prices.
Other variable costs you might encounter include:
- Raw material costs
- Equipment maintenance
- Shipping costs
You might also have semi-variable costs, depending on your business. Semi-variable expenses fluctuate to an extent, but you’ll still have them even with no production. Overtime is a typical example of a semi-variable cost, but you may see people categorizing it as a variable.
2. Classify and Total Expenses
You can find how much each OPEX costs you in a given time by looking at receipts and bank statements. Once you have them all, you can start adding them, but you’ll want to categorize them first. Some accounting software can do this for you, but you can do it on your own too.
Your categories don’t need to be overly specific, but you should have a couple. Organizing your expenses by type will help you see which parts of your operation cost you the most. There’s no one way to do this, but you can try categories like development, administration and utilities.
The timeframe you look at for these expenses may vary depending on the kind of report you’re filing. Generally speaking, though, you want to look at OPEXes from at least six months. That way, you can see any emerging trends in your spending.
3. Organize Totals for Reports
Once you have all the totals and categories, you can organize them into reports. Depending on what kind of document you’re filing, you may organize these differently. That’s why classifying them in the previous step tends to help you out.
If these reports are for someone else, which they most likely are, consider what they want to see. Consider what matters most to your potential partners or investors and organize the document accordingly. You want them to find what they’re looking for with as little work or math as possible.
What to Do with Operating Expense Totals
There are two central figures you’ll calculate with your OPEX totals: breakeven and operating ratio. Breakeven shows you what your sales price should be to cover your OPEXes at a given sales volume. Since charging the result of this equation would mean zero profits, you know to never sell for less than that.
To find your breakeven price, take your fixed costs, and divide them by your gross profit margin. You can find your gross profit margin by subtracting your variable costs per unit from your selling price.
Your operating ratio shows you and any investors how efficient your management is. You want to aim for a smaller ratio since that means you’re better at balancing expenses and revenue. To find this number, add your OPEXes and cost of goods sold, then divide that figure by your net sales.
You can use your operating ratio to see if you need to change anything about your business. If you have a low one, you can use it to demonstrate to potential investors how profitable your company is.
Understanding Costs Is Essential to Running a Business
If you don’t know how to calculate your operating expenses, you may find it challenging to run your company. On the flip side, having a deeper understanding of your costs can help you be a more effective business owner. Calculating your OPEXes will help you appeal to investors and improve your company.