Operating expenses: What are they? How to control them? Complete guide!

When effectively managing a company's finances, there are several crucial details to understand. Among these are operating expenses. These costs should always be included in the accounts.

But do you know exactly what operating expenses are? And how to calculate them? In this article, we'll explain that and go even further, showing you how you can organize them within your company.

Follow along and get all the information on the subject.

What are operating expenses?

Operating expenses are the costs a company incurs to maintain its operations. They are distinct from financial expenses, which refer to interest and other charges related to the company's financing.

They can be divided into two main categories:

• Fixed expenses: These are expenses that do not vary with the company's sales volume. Examples of fixed expenses include rent, salaries, insurance, and taxes.
• Variable expenses: Variable expenses are expenses that vary with the company's sales volume. Examples of variable expenses include production costs, sales commissions, and shipping.

In other words, operating expenses are all the costs you need to incur for your company to function properly; they are the total costs you will incur for each operation you carry out.

How to calculate operating expenses?

To calculate operating expenses, you need to identify all the expenses a company incurs to maintain its operations. These expenses can be divided into two main categories: fixed expenses and variable expenses.

Once all expenses have been identified, they must be added together to obtain the total value of operating expenses.

The formula to calculate it is very simple:

Operating expenses = Fixed expenses + Variable expenses

It's important to note that the calculation may vary depending on the company and its industry. Some companies may have additional operating expenses, such as marketing expenses, research and development expenses, or travel and entertainment expenses.

Operating expenses can also be calculated monthly, quarterly, semi-annually, or annually. The frequency of calculation depends on the company's needs.

Calculating operating expenses is an important tool for a company's financial management. By understanding these expenses, a company can identify opportunities to reduce costs and improve profitability.

Calculating operating expenses is important for several reasons, including:

• Financial planning: Calculating operating expenses is essential for a company's financial planning. By understanding its expenses, a company can estimate its revenues and costs and thus develop a realistic budget.
• Cost control: Making the calculation allows the company to control its costs and identify opportunities for reduction.
• Performance evaluation:  It can be used to evaluate a company's performance. By comparing expenses from one period to those from another, a company can identify trends and take corrective action if necessary.
• Decision making: It can be used to support a company's strategic decision-making. For example, by understanding operating expenses, a company can decide whether to expand its business, launch new products or services, or invest in new technologies.

Therefore, calculating operating expenses is an important tool for a company's financial management. By understanding its expenses, a company can make more informed decisions and improve its performance.

What are the types of operating expenses?

Operating expenses are divided into two main categories: fixed expenses and variable expenses.

Fixed expenses Fixed expenses are expenses that do not vary with the company's sales volume. Examples of fixed expenses include rent, salaries, taxes, insurance, depreciation, and amortization.

Variable expenses Variable expenses are expenses that vary with the company's sales volume. Examples of variable expenses include production costs, sales commissions, shipping, and consumables.

In addition to these two main categories, operating expenses can be divided into other groups depending on the area of the company they relate to. For example, they can be divided into:

• Commercial expenses: are expenses related to the sale and distribution of the company's products or services.
• Administrative expenses: are expenses related to the management of the company. Examples of administrative expenses include:
• Other operating expenses: are expenses that do not fit into the previous categories.

Classifying operating expenses is important for a company's financial management. By understanding the nature of expenses, a company can identify opportunities to reduce costs and improve profitability.

Some examples of operating expenses

Here are some examples of operating expenses of each type in more detail so you can better understand how they work within your company.

In relation to Fixed expenses, we have:

• Rent: the cost of renting a physical space for the company to operate.
• Salaries: the cost of paying the company's employees.
• Taxes: the cost of paying taxes to the government.
• Insurance: the cost of protecting the company against risks such as fire, theft and damage.
• Depreciation: the cost of wear and tear on assets such as equipment and real estate.
• Amortization: the cost of depreciation of intangible assets such as patents and trademarks.

Already examples of Variable expenses they are:

• Production costs: the cost of producing the products or services offered by the company.
• Sales commissions: the cost of paying commissions to the company's salespeople.
• Freight: the cost of transporting the company's products or services to customers.
• Consumable materials: the cost of materials used in production or provision of services, such as packaging, supplies and disposable equipment.

Examples of Commercial expenses include:

• Sales commissions: the cost of paying commissions to the company's salespeople.
• Freight: the cost of transporting the company's products or services to customers.
• Advertising and marketing: the cost of promoting and advertising the company's products or services.
• Packaging: the cost of packaging the company's products or services.
• Order preparation: the cost of preparing customer orders.

Depending on the company, you still have the Administrative expenses:

• Administrative staff salaries: the cost of paying the company's administrative staff.
• Office rental and maintenance: the cost of renting and maintaining a physical space for administrative staff to work.
• Third-party services (accounting, consulting, etc.): the cost of contracting third-party services for the company.
• Office supplies: the cost of materials used in the office, such as paper, pens and computers.
• Telecommunications: the cost of telecommunications services such as telephone, internet and cell phone.

Finally, you may still have other administrative expenses that must be taken into account for your company to function, such as:

• Research and development expenses: the cost of developing new products or services.
• Travel and entertainment expenses: the cost of business travel and entertainment events.
• Maintenance and repair expenses: the cost of maintaining and repairing company assets.
• Depreciation and amortization expenses: the cost of wear and tear on assets such as equipment and real estate.

These are just a few examples, and a company's specific operating expenses can vary depending on its industry and size.

What is the difference between operating and non-operating expenses?

Operating expenses are the costs a company incurs to maintain its operations. They are distinct from financial expenses, which refer to interest and other charges related to the company's financing.

Non-operating expenses are expenses that are not directly related to the company's core business. They can be caused by unexpected events, such as natural disasters or investment losses, or by activities that are not essential to the company's operations, such as asset sales or dividend income.

The main difference between operating and non-operating expenses is that operating expenses are expected and recurring, while non-operating expenses are unexpected and non-recurring.

Operating expenses are important for analyzing a company's financial health. They are used to calculate a company's operating profit, which is an important indicator of its profitability.

Non-operating expenses are important for analyzing a company's long-term profitability. They can affect a company's net profit, but they aren't necessarily a sign that the company is in trouble.

Some examples of non-operating expenses include:

• Losses from natural disasters;
• Investment losses;
• Gain from sale of assets;
• Dividends received;
• Loan interest;
• Compensation;
• Costs not related to the company's day-to-day operations.

What about the difference between operating and administrative expenses?

Operating and administrative expenses are both operational expenses, meaning they are costs a company incurs to maintain its operations. The main difference between the two is that operational expenses are related to the company's core business, while administrative expenses are related to its management.

Administrative expenses include costs such as administrative staff salaries, office rent and maintenance, third-party services (accounting, consulting, etc.), office supplies, and telecommunications. These expenses are necessary for the company to manage its operations.

Thus, operational expenses are related to the company's core business, while administrative expenses are related to its management. Both expenses are important to the company's financial health, but they have different objectives and impacts.

How to organize operating expenses?

Organizing operating expenses is an important task for a company's financial management. By organizing expenses, the company can identify opportunities to reduce costs and improve its profitability.

See tips for organizing your expenses:

• Classify expenses: The first step is to classify expenses into categories, such as fixed expenses, variable expenses, commercial expenses, and administrative expenses. This classification will help the company better understand its expenses and make more informed decisions.
• Collect data: Gather all information about your company's expenses, including amounts, dates, and categories. This information will be needed to analyze expenses and identify cost-cutting opportunities.
• Analyze the expenses: Use the information collected to analyze the company's expenses. Compare expense amounts from one period with those from another. Also, compare one company's expense amounts with those of other companies in the same industry.
• Identify cost reduction opportunities: Based on expense analysis, identify cost-cutting opportunities. For example, the company can negotiate better prices with suppliers, reduce headcount, or automate processes.

Here are some tools that can help you organize your operating expenses:

• Accounting software: Accounting software can help you collect and organize information about your company's expenses.
• Spreadsheets: Spreadsheets can also be used to organize company expenses.
• Expense management systems: Expense management systems are specialized tools that can help automate the process of organizing expenses.

Managing operating expenses is an ongoing task. The company must review its expenses regularly to identify new cost-cutting opportunities.

Did you like the tips? Follow our page to learn more about how to manage your company.