What Are Operating Expenses?
Operating expenses are expenses a business incurs in order to keep it running, such as staff wages and office supplies. Operating expenses do not include cost of goods sold (materials, direct labor, manufacturing overhead) or capital expenditures (larger expenses such as buildings or machines).
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What Is Included in Operating Expenses?
Operating expenses include:
- Payroll for staff (excluding labor for manufacturing)
- License fees
- Marketing (including for social channels like Facebook)
- Accounting fees
- Building maintenance and repairs
- Office supplies
- Attorney fees
- Property taxes on real estate
- Vehicle expenses
- Travel expenses
Operating Expenses are reflected on a company’s income statement.
What Does an Increase in Operating Expenses Mean?
An increase in operating expenses means less profit for a business. Often operating expenses receive the most scrutiny from a company, as these types of costs may be less fixed than their non-operating expenses, manufacturing costs and capital expenditures.
A company’s senior management may try to reduce operating expenses by outsourcing areas of the business or allowing some of the existing staff to work from home. This cuts down on the actual physical space needed for staff at the office. Management may also try implementing money saving techniques such as automating parts of the business or reducing salaries for new hires.
What Is a Non-Operating Expense?
A non-operating expense is one not related to a company’s day to day business operations or manufacturing. They include costs for:
- Bank fees (including interest charges)
- Lawsuit payments and associated fees
- Currency exchange fees
- Restructuring costs
- Obsolete inventory (products that can no longer be sold)
Are Operating Expenses Included in COGS?
No, operating expenses and cost of goods sold are shown separately on a company’s income statement. This is because cost of goods sold are directly related to the production of a product, as opposed to daily operations.
Operating Expense Ratio
The operating expense ratio (OER) is the cost to operate a piece of property compared to the income the property brings in. It is a very popular ratio to use in real estate, such as with companies that rent out units. A low OER means less money from income is being spent on operating expenses.
OER can also be used to gauge the difference in operating costs between two properties. For instance, if a company owns two similar plants in Michigan, with similar outputs, and one’s OER is 15% more than the other, management should investigate the reasons why.
Are Wages Operating Expenses?
Administrative expenses such as full time staff salaries or hourly wages are considered operating expenses for a business. The specific costs for hiring labor to produce a product is calculated separately, under cost of goods sold, and are not operating expenses.