It’s crucial to track your operating expenses over time because they help you identify areas to optimize and increase profitability. However, it’s important to understand exactly what each line item means before you can truly decipher your operating expenses.
Operating expenses are the cost of doing business. They include costs like rent, utilities, insurance, payroll and marketing.
In this post, we’ll break down the most common operating expense categories and show how they fit into your business model.
Equipment: Costs related to equipment such as computers, printers and office furniture.
Maintenance: Costs associated with maintaining equipment such as repairs and cleaning contracts.
Marketing: Costs related to advertising, marketing campaigns or events that bring customers into your business. These can include online advertising or social media marketing costs in addition to traditional advertising like print ads or billboards.
Rent: The cost of leasing the space where you operate your business. This includes rent for offices, warehouses and retail stores (but not apartments). It also includes taxes on the building itself such as property taxes and building maintenance fees.
Legal & professional services: Legal fees for things like contracts and trademarks; accounting services like bookkeeping; auditing services; consulting services like accountants or lawyers who help you set up your company; public relations firms that help promote your company's image and reputation.
Utilities: These include electricity, gas and water bills that are charged separately by utility companies for the supply of energy used by your business premises. Utility rates vary depending on where you live and how much energy your company consumes each month. You can find out what these costs are before you sign a lease or make an offer on a property by contacting utility suppliers directly or checking with real estate agents who specialize in commercial properties for sale or rent in your area.
Insurance: This includes property insurance (which covers damage to your building) as well as liability insurance (which protects against lawsuits if someone gets hurt at your place of business). If you're an independent contractor who works outside an office setting, this category would include home-based business insurance policies.
Employee salaries and benefits: Salaries cover base salaries plus any bonuses or other incentives paid out
We hope this article has served to clear up some of the confusion around operating expenses. The truth is that you can learn how to correctly track your expenses by taking the time to fully understand each of the line items listed above. You’ll also want to make sure to have good recordkeeping throughout the year, so you have specific dates (and amounts) for each expense, and retain those records for future reference.