Operating Expenses: what they are and how they impact your business

Did you know that investors can assess a company’s financial health based on its operating expenses? The explanation is that they can generate a positive or negative result on the profitability of a business.

So, companies with very high expenses and compromised cash flow can be classified as high investment risk . Therefore, if you intend to maintain the longevity of your business and make it grow, better understand what operating expenses are and how they impact the success of your enterprise.

In this post, see what types of operating expenses are and how technology can help in the difficult mission of your company’s financial planning and management.

Operating expenses: what are they?

To keep a business running, there are operating expenses that need to be paid. But what are these expenses?

We can define expenses with payroll, taxes, energy and water bills, internet, rent, office supplies, building and equipment maintenance, marketing campaigns, among others.

These expenses are described in the Statement of Income for the Year (DRE) and, although they are not the core activity that generates profit, their control is essential for good financial planning.

For business financial control , it is important to analyze the operating expenses data well to avoid waste and reduce costs and strategic investments.

3 types of operating expenses

In the category of operating expenses, there are several subtypes of expenses to keep a company running. Thus, when separating, it is necessary to understand well what these expenses are and where they fit. These expenses can be classified into 3 types. Check out!

1. Administrative expenses

Administrative expenses are indirect costs of the operation, which are not linked to the sales process. These expenses are essential for the core activity to be carried out.

Examples of these expenses: energy bills, payment of wages, insurance, taxes, benefits such as transportation vouchers, health insurance and others.

2. Commercial expenses

Selling expenses are directly linked to the sales process. Here, sales commission expenses are included, but the fixed salary is included as an administrative expense. It cannot be confused.

We also have examples of business expenses: gifts, sales events and marketing campaigns, promotional materials and others.

3. Other expenses

Operating expenses that do not qualify as administrative or commercial expenses are included in other expenses. These are specific expenses for a given sector, for example, companies in the export sector.

In addition, industries that invest in research and development of new products will include their expenses in other expenses.

What are the differences between operating expenses and administrative expenses?

Many people confuse operating expenses with administrative expenses. To clarify doubts, know that administrative expenses are also operational. Operating expenses, however, include other categories that are not administrative.

Furthermore, administrative expenses are also known as fixed costs, because they do not depend on sales volume or revenue. Since the beginning of business activities, they exist in cash flow .

Therefore, it is important to plan the budget for the payment of these expenses every month and avoid delays to keep the cash flow positive and not harm the financial health of the business.

How do operating expenses impact a business?

First, they must be included in the company’s financial planning, because they are recurrent for the operation of all activities. This is because, if one of these expenses is not paid, it may incur fines or even interruption of activities.

For example, it would be failing to pay a business license or taxes. Still, not paying the light bill of an industry and all production stops due to power cuts.

Understand that these are not expenses related to billing, but to activities that impact the entire company. In addition, it can still be a decisive factor in attracting investors, by maintaining a positive cash flow. It can also repel the same investors if the account balance is negative.

In case of non-payment of operating expenses that lead to the interruption of industrial production, the company may lose sales due to not having enough stock, causing delay in delivery. Furthermore, it can affect the entire chain of suppliers and distributors, being the key factor in the success or failure of a business.

How to calculate operating expenses?

To effectively calculate and control operating expenses, you need to write down all expenses and separate them by category to be included in the Income Statement. In this sense, even include expenses that seem to have a very small value, since everything that fits as an operating expense must be considered.

This is a simple summation operation, but you need to add up all the expenses in each category: wages, energy, water, taxes, marketing, maintenance, etc. So, take the time to list all the expenses and don’t forget any. That’s because, a simple forgetfulness can change the performance of your company.

Finally, try to compare the evolution of these expenses annually to find out if there was an increase or decrease in expenses. For this analysis, it is important to evaluate the company as a whole, in all its particularities, to verify if it is being profitable or not. Thus, by identifying the challenges, it will be possible to plan immediate actions for necessary improvements to maintain the company’s profitability.