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When you run a business, every penny counts as no one wants to be spending 1 penny more than they are supposed to.
1. Business Operating Costs
Operating costs are the expenses your business incurs on a daily basis. Although they are not directly related to you’re the production of your offering, they reflect what does it cost to operate each day. In simple words, they are what it takes to keep your business running.
For example, operating costs for bakers cover gas and electricity, not flour and eggs. At the end of the day, ingredients can’t bake themselves and the process to turn raw ingredients into a final product costs money. Bakers also need to be comfortable in the space they operate, therefore, heating and cooling costs, along with rent, are classified as operational costs.
Some of the most common types of operating expenses are:
- Payroll and the related taxes and benefits
- Utility bill
- Advertising and marking costs
Operating expenses play an important role on both the profit and loss statement as well as the cash flow statement. They have a say in how profitable a company is and how much cash is left.
Lenders look at net income before taxes, or pretax income which is calculated by subtracting operating expenses from revenue as this gives a clear picture of a company’s financial health.
While a business may initially appear to be profitable when subtracting cost of goods sold from revenue, the true test of business profitability comes when operating expenses enter the equation because they are just as important.
Operating expenses also provide valuable insights such as when one needs to cut costs. They also give a red flag for overspending. Looking at operating expenses is one of the best ways to spot trends and address potential problems before they cause more harm to your business.
2. Cut Your Operating Costs for Your Business With These Helpful Tips
A business that isn’t on top of its finances cannot go far and it most likely has its days counted. One of the best ways to stay on top of finances is to control costs as lowering costs directly increases profits and it is ‘easier’ than finding ways to boost revenue.
Look for more affordable providers
Common business operating costs such as rent, utilities, insurance, supplies, etc all come from providers that need to compete for customers. For instance, if you live in a deregulated area, you have the power to choose your own provider and get the best rate on the market.
Outsource whatever is ‘draining’ your resources
Bookkeeping mistakes can cost you a fortune. You could save a fortune by outsourcing this function to a company abroad. Payroll processing is another function that can cost you less than you expect.
In a nutshell, outsource functions your business is weak at or simply those that your employees are wasting time on instead of making better use of their time to generate new business and actual value for the business. If your employees waste time, your business is wasting money.
Avoid interest at all costs
Debt is the enemy of healthy finances and therefore of any business. Aim to make interest free deals or very low interest deals as every dollar spend on interest is a dollar lost from your bottom line.
Invest in attracting talent and keeping your employees happy
If you have high turnover rates, you are probably doing something wrong. Firing and hiring a new talent costs 20% of their annual salary so you want to find the right people and keep them happy. For example, you can introduce a four-day work week that will both save you a lot of supplies and money from your utility bill while boosting It your employees’ productivity and moral.
Go green to save green
Energy-Star certified devices are designed to perform the same task while using much less energy, saving you money on your utilities and increasing the lifespan of your devices. Any kind of energy-efficient upgrade practically pays for itself while adding value to your brand in the eyes of customers who prefer moral and eco-aware companies and are often willing to pay a premium for their offerings.
Know your operating expenses, know your business. We all know that you have to spend money to gain money, but exactly how much money you’ll spend is on you. Regularly examining your operating expenses and making adjustments when needed is a prerequisite for business success.
Remember, every business owner can cut down their expenses to some extent. Have an open mind and think outside the box to find ways to reduce your operational costs without compromising the quality of your offering that should do all the talking.