Gaining a good understanding of your small business operating expenses is critical. Especially when you are evaluating past performance, making decisions about future activities or developing a business plan.
You will need to know what your operating costs are likely to be so that you can calculate
- Working out how you are going to price your products or services
- Calculating your breakeven point
- Working out how much funding you need for the next twelve months of operation
- Preparing Proforma Income Statements or budgets and
- Developing Cash Flow forecasts.
Identifying your Business Operating Expenses
Your operating expenses will be reported in your Income Statement. And will consist of the cost of sales, selling expenses and administrative expenses.
Examples of operating expenses include:
| Administrative Expenses | Production Costs | |||
| Accounting Fees | Freight In | |||
| Advertising | Inventory Purchases | |||
| Depreciation | Production Labour | |||
| Equipment Leases | Raw Materials | |||
| Insurance | ||||
| Membership Fees or Subscriptions | ||||
| Office Supplies | Selling Expenses | |||
| Postage | Distribution Costs | |||
| Rent | Freight Out | |||
| Salaries and Wages | Packaging Materials | |||
| Telephone | Sales Commissions | |||
| Training and Development Costs | Sales Discounts | |||
| Utilities | ||||
| Vehicle Expenses | ||||
This list is in no way comprehensive. The number and type of operational costs will vary from one business to the next depending on the type and size of the business. It is presented here as a guide and a memory jogger.
As you work your way through all of your expenses, estimate the amount you are likely to spend on each of them. Make a note of the frequency – how often will you be buying inventory, stamps or paying the freight company? Will you be paying for your business insurance once a year or every month?
You are going to need this additional information for your detailed Income Statements and your Cash Flow Statements.
Classifying your Costs
Once you have identified all of your operating costs the next step is to classify the costs. (Fixed or Variable).
The reason for doing this is the nature of the costs. Variable costs are just that – they vary with changes in proportion to any changes in sales. Examples of variable costs would be raw materials or sales commissions. These costs are not incurred unless the product is manufactured or sold.
Fixed costs are fixed, in other words, they will remain the same regardless of how many widgets you sell. Examples of fixed costs would be rent, equipment leases or salaries for your office staff. You are going to need this information to calculate your breakeven point.
What’s Next?
Now that you have identified and classified your costs, you can move on to setting your prices. Assuming that the numbers in your break-even analysis are reasonable, you can also start developing an operating budget.
