Paying for Business Operating Expenses
As the old saying goes, you have to spend money to make money. Business operating expenses prove that’s true. In order for your business to run smoothly and turn a profit, there are certain expenses you need to cover. These are called operating expenses.
However, it can be a challenge to pay for operating expenses. That’s why we’ve put together this article. We’ll talk about the different operating expenses you need to consider. We’ll also go over some of the problems businesses face when they try to cover their operating budget. Finally, we’ll provide some solutions. Use this information to ensure your business runs smoothly and nets you a solid profit.
What are Operating Expenses?
Operating expenses are the costs that it takes to run your business day-to-day. After all, any business has costs. Whether you provide goods or services, you need things to make your business work. And these operating expenses can get expensive. Let’s look at some of the most common operating expenses.
Some businesses can be run with just one person. However, as your business grows, you’ll need to hire employees. After all, there aren’t many businesses that can continue to grow without bringing in other people to help out.
But you need to pay the people you hire. If you miss payroll or are late with a paycheck then your employees won’t work as well. Sometimes they may not work at all. That can start a death spiral for any business.
Businesses also need marketing. No one can hire your services or shop for your goods they don’t know that they exist. Marketing includes anything you use to increase awareness and use of your business. It can include internet ads, promoted social media posts, radio and television ads, billboards, and anything else. These services don’t come cheap. But they’re necessary for your business to be successful.
In order to operate a successful and sustainable business, you need to operate legally. That means obtaining the appropriate licenses to conduct business.
The specific licensing needs depend on your business. For example, a marketing consultant firm probably doesn’t need much more than a license from their local or state government to operate. But a hazardous material disposal firm needs lots of different licenses and certifications to operate legally.
Businesses also need equipment to operate. That might be something as simple as a laptop. It could also be complex and specialized machinery. Equipment can be necessary to run a business. A delivery service needs vehicles to make its deliveries.
Equipment can also help your business be more efficient. For example, a new mixer can increase the productivity of a bakery. Equipment is so important that it’s usually the second most costly expense for most businesses after payroll.
Most businesses also need outside help. It’s costly and difficult to keep every single thing in-house. Many businesses hire accountants, consultants, and attorneys. These services let businesses get the expertise they need to operate without hiring new employees. After all, it’s much cheaper to put a lawyer on retainer than it is to hire in-house counsel.
Fixtures are anything you need for your place of business. For a small start-up, it might be something as simple as a few desks. A brick-and-mortar retail store needs decoration, a checkout counter, display racks and shelves, and more.
Finally, all businesses need insurance. Some companies need more insurance than others. Every business needs general liability insurance at the very least. That protects you from the random things that can go wrong in life. Some businesses also need industry-specific insurance products. These services are necessary, but they also add to the cost of doing business.
Barriers to Paying Operating Expenses
Unfortunately, things can get in the way of paying for operating expenses. That makes it hard to run a profitable business. There are two primary barriers to having the money to cover your expenses. The amount of business you’re doing and your cashflow.
The first problem that can prevent you from covering your operating expenses is a lack of business. This can happen if you’re not marketing properly. It can also happen if you aren’t charging enough for your goods or services to meet your costs.
There are only two ways to resolve this issue. One way is to generate more business. That might mean more marketing or promotions. The other option is to find a way to reduce your operating expenses.
The second barrier to meeting operating expenses is cashflow. Many business owners will tell you that it’s much harder to get paid for the services you provide or goods you sell than it is to actually provide those goods and services.
Many companies use invoices. That means your clients have a certain number of days to pay you. Some businesses offer as few as 15 days. However, in many industries it’s common to give 30, 60, or even 90 days to pay. That means your money isn’t available to you. As a result, it might be difficult to pay for your operating expenses.
Ways to Pay Operating Expenses
Now that we’ve gone over the different operating expenses and problems you might face paying them, it’s time to learn some of the options you have to pay for your day-to-day needs. Thankfully, there are lots of options for covering your operating expenses and growing your business.
Cash on Hand
The first option is also the simplest. Make sure your business has enough savings to have the cash on hand to cover your operating costs. This is the ideal solution for any business. However, it can be hard to have these kinds of cash reserves.
Another problem with using your available cash to cover operating expenses is that it makes it difficult to grow your business. After all, you need money to expand. If you’re continually dipping into your savings to meet daily expenses, then you can plan a budget or timetable for expansion and growth.
This can cause a business to stagnate. You might find yourself constantly treading water. You use the cash you have on hand to pay for expenses. Then you take the profit and put it back into your operating account. This cycle repeats itself and your business struggles to grow.
Another option to cover operating expenses is to take out a loan. Loans provide large infusions of cash. You can use this money to cover your operating expenses. As long as your business is bringing in more money than you pay in interest, then you’re coming out ahead.
There are lots of different loan options available. Most banks have loans designed for businesses. There are also small business loans available through the federal government. Other lenders offer specialized loans. These could be loans specifically for equipment. Equipment loans use the equipment itself as collateral. That allows you to protect the investments you’ve already made while expanding your business.
If you use a loan to cover your operating expenses, you need to be very sure of your business projections. After all, if you take out a loan for operating expenses and can’t make your payments, it could be the end of your business.
Another option to cover operating expenses is credit cards. You can use a line of credit to pay for the things you need day-to-day. Then, you pay off the balance on the card when you get paid.
This system works similar to taking out a loan. The difference is that, with a credit card, you’re only paying for the things you actually spend. Whereas with a loan you get a set amount and have to repay that entire balance.
This gives businesses more flexibility. This is because you can control your expenses better. You can also get special deals and bonuses from credit cards. You can use points and cashback rewards to lower your actual expenses. You can also use them to give yourself a well-deserved treat as a hard-working business operator.
Finally, credit cards give you the ability to make minimum payments. If your business has seasonal cashflow or other elements that cause your money to come in waves, then this can be a boon. You don’t get that option with loans. Instead, you need to pay the same monthly installment balance each month.
There are some problems with using credit cards to cover your operating expenses. The first issue is that it can be hard to get a line of credit that’s big enough to cover your expenses. That could mean having to manage multiple credit cards. That makes accounting tricky. It also makes the other issues with using credit cards worse.
The next issue with using credit cards is that they usually have a much higher interest rate than loans do. That means you’ll be paying more to borrow money. This can cut into your profits.
That problem gets worse if you’re only making minimum payments. If you don’t pay the whole balance each month, then the interest builds. This can lead to a situation where your balance grows and grows. Then it becomes hard to pay off the balance. Even if you do pay the balance off, your profits take a huge hit.
The final option for covering your operating expenses is receivables financing. There are two main types of receivables financing, invoice discounting and invoice factoring. We’ll cover the specifics of each of these options in a moment. But there are some things they have in common that warrant mentioning.
The biggest thing that invoice discounting and invoice factoring have in common is that they use your accounts receivable. That means that you’re accessing money you’re already owed. That’s very different from loans or lines of credit. Those financial products cause you to take out debts. They have high interest rates.
Another difference is that receivables financing doesn’t require your business to have good credit. Many new businesses don’t have a credit history. That can make it difficult to get loans or credit cards. With receivables financing, the provider checks your client’s credit.
That means that receivables financing offers a great way for businesses to meet their operating expenses. It also allows new businesses to get the money they need to operate and grow without a credit history. Let’s look at the different options for receivables financing.
The first option is invoice discounting. This type of receivables financing is when you are given a loan against your current receivables. The lender pays money against invoice assets. That means you’re borrowing against other funds you’re owed.
This option works differently from other loans. You pay the loan back out of the money that your clients and customers already owe you. Also, the amount of money you can borrow is limited by your current receivables.
The result of this situation is that you can get instant cash for the work you’ve done. You don’t need to wait for your clients to pay their invoices. Therefore, you’ll always have the money on hand to meet your expenses.
The second receivables financing option is invoice factoring. This is a bit different from invoice discounting. With invoice discounting, you still own the receivable assets. However, with invoice factoring, you sell the receivable asset to another company. They pay you for most of the invoice up front. You get the rest of the money, minus a small discount rate, when your customer or client pays their bill to the invoice factoring company.
For example, many of the best invoice factoring companies provide at least 80% initial funding. They also usually charge a 3% discount fee.
That means if you factor an invoice worth $1,000, then the company will pay you $800. When your client pays their invoice the factoring service will give you the remainder minus their discount fee. So, in this scenario, you’d get another $170 when your client pays their bill. This gives you access to the cash you need, when you need it.
As you can see, you really do have to spend money to make money. However, with the range of modern financing options, there’s sure to be a solution that works for your business. Use this information to help your business turn the profit you deserve.
If you own a business, operating expenses make up a large chunk of your business's outgoing capital. If you want to run a successful business, it's vital that you understand operating expenses and the influence that they have on the viability of your company.
While complex questions about operating expenses should always be handled by a personal accountant that has knowledge of your business's operations, we still receive a lot of general questions about operating expenses. Below are some of the most common questions we receive about business operating expenses.
General Operating Expenses FAQ
If you have general operating expense FAQs, have a look at some of our commonly received questions below:
What are operating expenses?
Operating expenses are simply expenses that fall within the typical operating norms of a business. This is an accounting term that covers a broad range of business-related expenses.
Is depreciation an operating expense?
The reality is that most businesses experience depreciation if they own assets. This means that depreciation is a typical expense – it counts as an operating expense in the world of accounting.
Is interest expense an operating expense?
Even though interest expense is a relatively normal form of expense for a business owner. It's not considered an operating expense in terms of accounting. It is considered a non-operating expense.
How much do owner-operators make after expenses?
This depends on a range of different factors, including non-operating expenses, taxes, equity stakes, and other costs and variable. It depends on the business that you own.
Is bad debt expense an operating expense?
This depends on the type of bad debt and how it came about. In most cases, you will find that bad debt expense is counted as an operating expense on your balance sheet. Almost all businesses have to factor in for bad debt.
Is the cost of goods sold an operating expense?
While the cost of goods sold may seem like a pretty straightforward operating expense, it's actually different. If you look at a traditional balance sheet, you'll find that these two expenses are separated.
How to find total operating expenses?
There's actually no set formula for finding operating expenses. The business world is constantly evolving, and new types of costs are incurred by businesses as the economy develops. To find operating expenses, you have to add all of the relevant costs together. If you're confused about a niche cost, it's best to talk to an accountant with expertise in your industry.
Is marketing an operating expense?
Yes. Advertising and marketing are among the many costs that factors into the operating expense category.
Is accounts payable an operating expense?
Accounts payable may seem like an expense, but it's actually not considered one in accounting terms. Therefore, it's not factored into operating expenses.
What is total operating expenses?
All of your typical operating costs added together. Not every expense that your business incurs will count as this type of an expense.
Is COGS an operating expense?
No, while these terms are very closely related, they don't fall into the same category. In fact, if you look on a balance sheet, COGS and operating expenses are typically entirely separate.
Are dividends an operating expense?
No, while you have to pay dividends out to investors in some cases, this isn't actually considered an expense. Therefore, it's not considered an operating expense either.
What are operating expenses and non-operating expenses?
Operating expenses are expenses that occur from normal operations within your businesses. Non-operating expenses are expenses that fall out of this category.
Would building improvements count as an operating expense?
In most cases, any repairs that you do to your building will be considered operating expenses. This can vary though, so it's best to speak with an attorney about this niche expense.
How to Calculate Operating Expenses FAQ
Calculating operating expenses isn't as straightforward as it sounds. Let's take a look at some of the common questions we receive about operating expense calculations below.
How to calculate operating expenses?
There's no set formula to find your total operating expenses. You simply need to identify all of your operating expenses and add them together. These will vary depending on the type of business that you're working with. If you need a business loan calculator then go here.
How to calculate gross up operating expenses?
If you want to calculate gross operating expenses, you need to add the total value of all of your operating expenses together. Remember, gross operating expenses is effectively the same thing as operating expenses.
How to calculate operating expenses from balance sheet?
To calculate all of your operating expenses using a balance sheet, you just need to identify the parts of the balance sheet that apply to the operating expenses formula. Then, add these totals together to find your total operating expenses.
How to calculate cash paid for operating expenses?
First, you need to add up all of your operating expenses on your balance sheet. Next, you need to subtract the total of non-cash expenses on your balance sheet. Next, you'll have your total cash paid for operating expenses.
How to find operating expenses?
You need to identify the types of expenses that are considered operating. This will vary on your industry and the purpose of each expense. If you're confused about any types of expenses, it's always best to speak to an accountant before making any rash decisions.
If you've found yourself confused about operating expense ratios, you may find the questions and answers below useful:
What is a good operating expense ratio?
It's often a good idea to take a look at your operating expense ratio if you want to get a good idea about the health of your business.
What is operating expense ratio?
If you're looking at operating expense ratios, you're looking at a ratio between your operating expenses and revenue. To find your operating expense ratio, divide the sum of your operating expenses by your revenue.
If you have any other questions, you may be able to find the answers in this section. Here are the other common questions we receive from some of our readers:
How to reduce operating expenses in retail?
This will depend on your business, but you can look at key expenses across the board to help find places you could save money. Factor in costs such as rent, advertising, and other common expenses that you have to pay.
How to reduce operating expenses in bank?
Again, this will depend on the type of bank that you're running. You should be looking at your total operating expenses and seeing where you can save money. For example, are you currently paying too much rent for your locations? Are there ways you can reduce the cost of your insurance payments?
Is inventory an operating expense?
Inventory costs count as operating expenses in many instances.
What are operating expenses examples?
There are a wide range of different operating expense examples available to business owners. Most operating expenses are common forms of expenses that most businesses are liable for paying. Advertising, rent, payroll, and equipment are all common forms of operating expenses.
What are pre-operating expenses?
Pre-operating expenses aren't really related to operating expenses. They factor in all the expenses undertaken prior to forming your company. Market research and investigation is often something that you may consider a pre-operating expense.
What are controllable operating expenses in a lease?
It's vital to understand controllable operating expenses if you want to understand the full cost of your lease. Controllable operating expenses are expenses that a landlord can often hand down to the leaseholder. For example, building a new parking lot may be something that you have to pay for as a leaseholder. Taxes, insurance, and a few other expenses are considered outside of this jurisdiction.
What is net operating expense?
There's no such thing as a net operating expense because the term only accounts for expenses. Gross operating expenses are simply the sum of all your different operating expenses.
Is R&D an operating expense?
Yes, R&D has typically been considered a type of operating expense. It will appear as an operating expense on your balance sheet.
What are considered operating expenses?
Operating expenses are typically the normal expenses that your business has to pay out through typical business operations. Operating expenses will vary depending on the type of expense and the industry that you're working in.
What are direct operating expenses?
Direct operating expenses normally apply to the ownership of a building or property. Direct operating expenses include all direct expenses associated with maintaining the property.
Is income tax expense an operating expense?
In most cases your income tax expense is a non-operating expense. But you should always speak to an accountant about your company's taxes and how they impact your bottom line.
How can operating expenses be broken into categories?
There's no particular need to break operating expenses into different categories. This being said, you can divide them into categories if this helps you better understand them. For example, you could put all advertising and digital marketing expenses into one category.
Is interest an operating expense?
No. Interest is an expense, but it is not considered an operating expense. In fact, interest is considered a non-operating expense.
How to cut operating expenses?
The answer to this question will depend on the type of business that you're operating. You should always be aiming to reduce your operating costs as much as possible – it can help you increase your company's profitability.
Do operating expenses include cost of goods sold?
No, while it may seem like the cost of goods sold should be included in operating expenses, this is actually a separate category on your balance sheet.
Are salaries an operating expense?
Yes. Your payroll is one of the major components that makes up your full operating expenses. This will be categorized as an operating expense on your balance sheet.
Are operating expenses tax deductible?
In most cases, yes. As always, it's essential to speak with a tax specialist about ways you can increase your tax deductions. If you want to run an effective and prosperous business, it's a good idea to make your business as tax efficient as possible.
How to forecast operating expenses?
Forecasting will depend on the business model and the industry you operate within. Many businesses come up with their own forms of custom forecasting. If you'd like to use a general forecasting technique, it's a good idea to use an online calculator or Excel template.
Is restructuring costs an operating expense?
No. While restructuring costs are considered to be expenses, they're not considered to be operational expenses. If you want to properly categorize these types of costs on your balance sheet, make sure to place them in the non-operations section.
What is a capital expense vs operating expense?
Capital expenses and operating expenses are two critical expense categories that are particularly relevant to small business owners. Operating expenses are the day-to-day operational costs that the business has to take on. Capital expenses are costs that the business takes on in order to position itself to profit in the future.
An example of a capital expense is a long-term asset such as the purchase or improvement of a building. An operating expense is a short-term expense such as payroll.
Is shipping and handling an operating expense?
This depends on whether you're selling or receiving goods. It also depends on who pays for the shipping and handling. If you want to know if your specific freight costs are an operating expense, it's sometimes best to speak to an accountant.
Does EBIT include operating expense?
This is quite a complex accounting question. But yes, in most cases EBIT does factor in operating expenses. You subtract your operating expenses from gross profit to find your EBIT.
Michelle worked at a teller at her local bank while she was earning her degree in economics. Then, after completing an MBA, she came back to the bank as a loan officer. As a result, Michelle is uniquely suited to providing advice to small businesses when it comes to selecting the best loan and credit products.
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