Operating costs are an essential part of accounting. In the world of business, you have to spend money to make money. Regardless of what your business sells — physical products, digital products, services, etc. — it will incur costs. Failure to track your business’s operating costs may result in decreased cash flow and lower profit margins. Alternatively, your business may fail to turn a profit if it has high operating costs. What are operating costs exactly, and how do you lower them?
What Are Operating Costs?
Also known as operational costs, operating costs encompass all ongoing and expected expenses associated with a business’s operations. Most businesses don’t have a single operating cost. Rather, they have multiple operating costs. Common types of operating costs include rental payments, insurance, product inventory, advertising, utilities and payroll. All of these costs occur on a regular basis. Therefore, they are considered operating costs.
You can calculate your business’s operating costs by adding up its cost of goods sold to its operating expenses. This simple formula will reveal your business’s operating costs. Alternatively, you can use accounting software to calculate your business’s operating costs. Regardless, you can’t ignore operating costs. Operating costs is an essential part of accounting, as it reveals how much your business spends to perform its daily operations.
Operating Costs vs Non-Operating Costs
Operating costs aren’t the same as non-operating costs. Non-operating costs involve expenses that aren’t directly associated with a business’s operations. One of the most common types of non-operating costs is interest fees. If your business has a line of credit or a loan, it will likely incur interest fees. Interest fees allow lenders to make money from loans and lines of credit. When paying interest fees, your business will incur non-operating costs.
How to Lower Your Business’s Operating Costs
There are several things you can do to lower your business’s operating costs. Shopping around, for instance, may offer cost-savings benefits in the form of lower operating costs. If your business has an insurance plan, try contacting several other insurance providers to inquire about a quote. Another provider may offer the same level of coverage at a lower cost. You can also negotiate bulk discounts with vendors. If you order products from vendors, for example, see if they are willing to offer your business a discount on bulk purchases.
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