As you start to develop balance sheets and other financial reporting documents, you may notice new categories and details that track your company’s success. One key section to watch is operating expenses. Learn more about what this financial term means and how it relates to your business.
Defining Operating Expenses
Operating expenses are the basic costs that come with running a business. They include expenses like materials, machinery, and labor to create the products or services sold. Operating expenses are also known as selling, general, and administrative (SG&A) expenses.
What Is the Difference Between Operating Expenses and Overhead?
Both operating expenses and overhead are essential for companies to stay in operation; however, they are 2 very different categories. Operating expenses are directly related to the production of an item, while overhead isn’t related to the production at all.
For example, a bakery would count flour, eggs, and sugar as part of its operating expenses. It would count a monthly rent payment for its kitchen as overhead.
Can You Lower Operating Expenses?
If you want your business to be profitable, you need to keep your operating expenses in line. Some costs are non-negotiable. For example, if you have a payment plan on a piece of equipment, that operating expense won’t change until you pay it off.
However, there are instances where you can save money on operating expenses. A vendor may give you a discount for buying in bulk, or you may source your materials from a more affordable company. This change in cost will increase your gross margin.
Are There Any Risks to Changing My Operating Expenses?
Increasing your operating expenses can reduce your profit margin, making your business less successful. However, there are also risks for lowering your expenses. If you cut costs too much, your product could become cheap and less desirable to customers—resulting in fewer sales.
If you want to accurately track your operating expenses, you need the right tools to keep your ledgers balanced. Try out the Sunrise app, which is free for small businesses. You can watch your operating expenses and overhead to ensure your business stays profitable.