What are operating expenses?

Operating expenses –– or opex for short –– are the costs associated with running your business. For that reason, your opex is important when it comes to keeping your company ticking along nicely. 

You’ll typically find operating expenses on a company’s income statement for a given period –– usually a month or a year. It pays to regularly scrutinise your operating costs to keep your outgoings down.

In this article, to make sure you have a good understanding of operating expenses, we’ll go over the following:

• What is classed as an operating expense?
• What are non operating expenses?
• Why it’s important to know about your operating expenses
• What to do if your operating expenses are too high

Operating expenses are all of the following:

• Office expenses
• Building maintenance and repairs
• Rent
• Utilities
• Accounting fees
• Insurance
• Payroll for staff
• Travel and vehicle expenses
• Marketing (for example, Google ads)

It’s important not to confuse operating expenses with capital expenditures since they follow different rules. Capital expenditures are also long-term investments, meaning you buy them to last for a long time, at least more than one year. For example, buying expensive machinery or a computer. 

You’ll find operating expenses on a company’s income statement, which is a report that shows the business’s revenues, expenses and overall financial performance for a specific period of time. You can find more information about income statements and other important financial documents here.

Meanwhile, operating expenses refer to the costs of running your day-to-day operations.

Non-operating expenses are costs not related to the day-to-day running of your business. They include the following:

• Bank fees and interest charges
• Currency exchange fees
• Restructuring costs
• Depreciation
• Products that can no longer be sold

It’s important you’re able to identify operating expenses in your business. An increase in operating expenses boils down to one thing: a reduction in profit. That’s why understanding your opex is vital to the long term viability of your business.

If you suspect your opex is too high, you should take steps to improve your business’ finances. High operating expenses means your business could be running less efficiently than your competitors. 

Operating expenses are made up of fixed and variable costs. When you want to reduce your operating expenses, the best place to look is your variable costs. 

Variable expenditure, as the name suggests, offers some degree of flexibility. That’s why it’s important to scrutinise these outgoings as it’s often the easiest way to improve your company’s finances. However, when reducing expenses, business owners need to consider whether they can maintain their ability to compete with their competitors.

Adjusting some of your habits makes it much easier to reduce variable costs such as food, fuel, and entertainment costs than fixed costs like rent, insurance, and council tax. Some of the things you could consider changing include:

• Turning off equipment when they aren’t in use
• Using energy-efficient light bulbs
• Finding a cheaper payment processing machine
• Negotiating better deals with your supplier –– or switch to a cheaper one
• Finding a more cost-effective accounting software
• Claim them back as business expenses (Countingup has a separate guide on the topic here)
• Switching broadband supplier to one that costs less

There may be many variable costs specific to your business, and it’s about getting creative to see how you can cut costs. The Countingup app includes intuitive accounting software that allows you to keep track of your expenses to help you identify where you could cut some costs. 

Online marketing is an excellent way to cut some costs in the marketing area. You can advertise your business cheaper online than traditional methods like flyers or magazine ads. 

Marketing online typically involves three main staples: a website, content creation and a social media presence. Make sure your business website is kept up-to-date and use it to publish content on topics that interest your target customers. You can then use social media to spread the word about your business, as well as new content or exclusive deals you’ve got going. 

You can also market your website using search engines and advertising platforms like Google, Facebook and Amazon. These companies take your advert and strategically place it for potential customers to see, allowing you to drive people to your website from around the world –– and it doesn’t have to be expensive at all.

Learn more about small business marketing here.

Reducing your variable costs might not be enough. To make sure your business’ finances are in a good place, you might need to go one step further and look at your fixed costs. There are three easy steps you can take to do this. 

1. Look over your bills

Look over all your fixed costs and put them into a spreadsheet. You should detail the company the cost is with, how vital it is to your business, and when the contract ends, and consider whether you need that item. If the item isn’t necessary to run your daily operations and it doesn’t end for a while, it might be worth reaching out to the supplier to see if you can terminate the contract early and save some pennies.

2. Compare 

If you have bills coming to an end and you think you could get a better deal, it’s time to have a shop around. Price comparison sites don’t always give you the best prices because sometimes the brokers who receive your details look to maximise their commission. The best way to do this is by speaking with suppliers separately.

3. Negotiate and switch 

When it comes to negotiating, it pays to be a little cheeky. After all, you don’t ask; you don’t get. The main thing you’ll want to negotiate is price, but there are other factors you could consider, too. Think about what will help your business. Some examples of what you could discuss are customer support, delivery times, payment terms, and lifetime deals.

You should now be able to identify what operating expenses are and why they are important to consider when it comes to managing your business. If you’re unsure about any other terms, check out our resources page where you’ll find lots of useful information, tips and more.  

The Countingup business current account comes with free built-in accounting software, and provides real-time insights into your business finances and cash flow. Find out more here.