Operating expenses are the costs incurred by a business during its regular operations. Accurate calculation of operating expenses is vital for understanding the true financial health of a business, as it impacts profitability and ultimately determines whether or not a company thrives or fails. This article will walk you through the steps needed to help you accurately calculate your business’s operating expenses.

Step 1: Identify Your Operating Expenses

Operating expenses fall into two categories – fixed expenses and variable expenses.

Fixed Expenses: These are costs that do not change with your production level or number of customers. Examples of fixed costs include:

– Rent or mortgage payments

– Insurance premiums

– Salaries and wages

– Property taxes

– Utility bills

Variable Expenses: These costs do change depending on the level of production or the number of customers. Examples include:

– Raw materials

– Shipping fees

– Sales commissions

– Manufacturing labor

– Credit card transaction fees

Begin by listing all of your business’s operational costs, breaking them down into fixed and variable categories.

Step 2: Gather Financial Records

Gather your financial records, including income statements, balance sheets, bank statements, and receipts. These documents will assist you in keeping track of costs and monitoring changes in your operating expenses from month to month.

Step 3: Calculate Monthly Operating Expenses

To calculate monthly operating expenses, use the following formula:

Total Monthly Operating Expenses = Total Fixed Costs + Total Variable Costs

Calculate Fixed Costs:

Add up all fixed costs incurred during a given month; this is your total fixed cost.

Calculate Variable Costs:

For each variable cost, multiply the per-unit cost by the number of units produced or sold in a given month; this is your total variable cost per unit. Add up each total variable cost for every unit type to get the total variable costs.

Then combine both totals to determine your total monthly operating expenses.

Step 4: Monitor and Review

Continuously monitor and review your operating expenses as part of your business’s financial management. Regular reviews can help identify potential areas for cost reduction without compromising the quality of your products or services.

Conclusion

Understanding and accurately calculating your operating expenses is vital for any business owner. By following these steps, you can gain a clearer insight into the costs involved in running your business, allowing you to make informed decisions about budgeting and resource allocation. With a strong grasp of this essential aspect of business management, you position yourself for greater success and increased profitability in the long run.