Learn how to calculate operating expenses

May 10, 2023 - 20:25
May 11, 2023 - 01:04
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Learn how to calculate operating expenses

Now that you know what operating expenses are and how important it is to keep track of them, you need to figure out how to calculate each one.

There are some strategies for you to be able to perform this calculation, and we will present you with a very simple model!

Identify all expenses

The first step is to identify all your business expenses. If you do not have this follow-up, the ideal is that you use the company's cash flow .

Also, you need to be aware of the differences between costs and expenses, as you'll see in this article.

Divide fixed and variable 

After listing the expenses, it is necessary to perform the grouping between fixed and variable expenses.

Fixed expenses are known as “predictable expenses”, as they do not change the cost of the product. Thus, regardless of the number of sales or production itself, these values ​​will not be affected, as they are not related to the product.

These expenses are normally found in the subgroup of administrative expenses, some of the most common being:

rent;
pro-labore;
water and energy.
To understand it in a practical way, answer the following question: if your business produces and sells twice as much next month, will your company's rent increase? 

The answer is “no”, because it has nothing to do with productivity or sales volume.

Variable expenses, as the name suggests, vary according to the company's production and sales levels, some examples being:

delivery charges;
commissions;
transportation expenses.
To identify this type of expense, you can use the same logic applied to fixed expenses. For example: if, in the coming months, your company produces and sells much more, will the commission values ​​be affected?

In this case, the answer is “yes”, because the greater the volume of sales made, the greater the amounts allocated to the commercial team.

Add up all expenses separately

After identifying expenses and classifying them between fixed and variable, it's time to add them up and assess their impact on your finances.

At this time, to prevent possible errors from occurring, the ideal is that you use spreadsheets or systems to help you perform the calculation more safely. In addition, you can ask others to verify that the values ​​and results are correct.

After the sum, it is necessary to analyze whether the value found is in accordance with the planning and needs of the company. Thus, it is much simpler to identify the main gaps in operating expenses and at which points you could reduce expenses to increase financial efficiency.

Learn how to identify what is cost and what is expense

Although many people treat the two terms as similar, it is essential that the entrepreneur knows the difference between costs and expenses to understand how his business works and what values ​​impact his results.

Simply put, costs are all expenses related to the direct production of business goods and services. Therefore, they are directly related to what is marketed by the company.

Expenses, on the other hand, do not have a direct relationship with production, but they are fundamental to make the organization work in the best way.

There are some types of costs that are quite common for most ventures, such as:

  • feedstock;
  • salaries of employees who are part of the productive sector;
  • packaging;
  • depreciation of production machinery and equipment;
  • goods purchased for resale.


Thus, there are several ways to identify what costs and expenses are in your group of accounts, but you can use a strategic question for this: “ If, in my company, this account did not exist, could we continue to produce our product? ”

To make it even simpler, let's use a practical example.

Imagine that you own a bakery, and you are analyzing your group of accounts to identify what the company's costs and expenses would be. 

The first account is material for the production of cakes and sweets (raw material). If you do not pay or do not have this material in your company, is it possible to continue producing your product? No.

Now, you are analyzing the last expenditure on the purchase of cleaning supplies. If you do not purchase any of these products in the coming months, could your company continue producing?

Yes! However, this could significantly affect the quality of your products and the functioning of your business.

Most common operating expenses in companies

As each company works in a different way, it is common for the items covered by operating expenses to vary from one activity to another. 

However, there are some common and frequent elements in operating expense groups for most businesses. See below!

Marketing 

Marketing and advertising activities are within the subgroup of commercial expenses, acting with the objective of boosting the sale of the company's final product.

Therefore, despite being an investment that directly affects the company's financial results, this expense is not directly related to production.

office supplies

Office supplies are all common materials so that administrative activities can be done, such as:

reams of paper;
printer;
pens;
computers;
staplers;
management systems.


Accounting

Accounting, whether internal or outsourced, also has no direct connection with production. 

For this reason, even though it is an essential activity for the company to function, it is included in the group of operating expenses.

Maintenance

Performing maintenance on machinery and equipment is classified as an operating expense, as it also acts as a production support activity. 

Therefore, it is in the administrative expenses group.

Consulting and training 

As with the HR, personnel and financial departments, carrying out consultancy and training for teams does not immediately affect production, but serves as an activity that supports and aims at the continuous improvement of activities.

Salary

In this expense, it is important that you understand that not all salaries are allocated in this group. 

What does that mean?

The salaries of employees who are part of the operation are not part of operating expenses, because if payment is not made or there is no employee to be paid, there would be no product for sale.

For this reason, only the salaries of employees who work in the operation support sectors should be listed here.

Advocative hours

Similar to the case of accounting, this group of expenses acts as a support solution for the company, and not related to the core activity. 

Since it is not directly related to production, it is considered an operating expense in the administrative expenses subgroup.

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