A Beginner’s Guide to Operating Expenses for Small Businesses

What are operating expenses?

Operating expenses, operating expenditures, or “opex,” refers to the costs incurred by a business for its operational activities. In other words, operating expenses are the costs that a company must make to perform its operational activities. An increase in operating expenses means less profit for a business.

What are operating expenses?

Operating expenses along with expenses incurred from production of the product are recorded under primary activity expenses. Note that not all OpEx are fixed costs, as an item like office supplies can be viewed as more of a variable cost since more purchases would be made if production levels were higher. In such a way, a manager can better understand the nature of the expense. A fixed cost remains the same no matter what the production level is, while variable cost does vary with the number of products or services that a company produces. The three main areas of your operating expenses are Marketing and Sales (M&S), General and Administrative (G&A), and Research and Development (R&D). This is one of the factors business owners look at when considering staff cuts.

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You can easily manage your operating expenses using accounting software. If you’re ready to move on from handwritten journals and ledgers or are looking for software more suitable for your business needs, be sure to check out The Ascent’s accounting software reviews. This can include anything from sales, advertising and marketing to distribution costs to research and development. Many selling, general & administrative expenses are also overhead costs. Capital expenses and operating expenses have significant differences in terms of how they are applied to taxes and how they are accounted for in a budget. Companies also may have different processes for how each type of expense is approved.

What are operating expenses?

R&D refers to any kind of activities companies undertake to innovate and develop new products. Suppose you’re an early-stage startup in a highly competitive market. In that case, it is only natural that you dedicate more extensive resources to this area to drive growth and capture/maintain market share. While this is the average benchmark for most SaaS companies, it’s also essential to understand your expenditures’ efficiency. If this cost is efficient in driving growth, it will make sense to invest more in this area.

The significance of operating expenses

Harold Averkamp has worked as a university accounting instructor, accountant, and consultant What are operating expenses? for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein. You can try decreasing your COGS by using cheaper labor or materials, but quality may suffer and lead to lost business. In our illustrative example, our company has the following financial data as of Year 0.

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Because they lower profits, operating expenses also lower the taxes a business has to pay. If a business fails to record them correctly it may end up paying more tax than it needs to. Conversely, operating expenses are ongoing and businesses may pay these bills, for example, monthly or quarterly. These costs also require some degree of budgeting as these are recurring expenses. On the other hand, operating expenses can be deducted from the company’s taxes the same year they were incurred. Operating expenses include daily expenses like the cost of rent, office supplies, and staff wages that are part of running ongoing operations. They don’t have perks or frills, which keeps operating expenses small, compared to others in their industry.

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Its counterpart, a capital expenditure , is the cost of developing or providing non-consumable parts for the product or system. For example, the purchase of a photocopier involves capex, and the annual paper, toner, power and maintenance costs represents opex. For larger systems like businesses, opex may also include the cost of workers and facility expenses such as rent and utilities. In general, businesses are allowed https://online-accounting.net/ to write off operating expenses for the year in which the expenses were incurred. However, businesses must capitalize capital expenses/costs or write them off over time. The IRS has guidelines related to how businesses must capitalize assets, and there are different classes for different types of assets. The Internal Revenue Service allows businesses to deduct operating expenses if the business operates to earn profits.


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