10 Examples of Operating Costs in Running a Business
Businesses can incur expenses from when they begin operations throughout their time in their industry. Operating costs include many of a business's primary needs, which factor into its profitability. Understanding operating costs can help you make your business more efficient and increase profits.
In this article, we define operating costs, explain why they're important, describe how they differ from startup costs and capital expenses and share some examples.
What is an operating cost?
An operating cost is an expense from the daily operations, materials and other necessary components an organization uses regularly. These costs are the most basic expenses of a business and help form the basis on which companies build their overall expense sheets and budgeting. Calculating operating costs can help organizations create more accurate budgets and balance sheets.
Why are operating costs important?
Operating costs are important for many reasons, including helping you to:
Determine base expenses: Base expenses are the tools, equipment, administrative needs, maintenance needs, properties and other expenses that keep a business operational. Determining these can help a company analyze the value of its basic assets and what materials or equipment costs it has.
Provide financial information to investors: Investors may be interested in reviewing a company's operating costs to help them determine if the company is a beneficial investment. Low operating costs can boost profits and make a company more desirable for investors.
Determine how a company can save money: When a business tries to increase its profitability, it may find that it's unable to increase the costs of its goods and services. However, decreasing operating costs may be an alternative for increasing profitability.
Calculate profits for shareholders and executives: Operating costs form the basis of a company's expenses or the cost of generating profits for shareholders and company executives. These costs can determine a company's financial health and whether it might produce a return on investment (ROI).
10 examples of operating costs
Here are some examples of common operating costs for businesses:
1. Salary and benefits
The wages or salaries a company pays its employees, including salary employees, hourly personnel and contractors, are operating costs. Operating costs also include the cost of benefits that a company pays to employees, such as health insurance, life insurance, paid time off or other benefits packages. For example, a company hires 20 employees at $13 per hour and offers health insurance. It can add the total cost of each employee's hourly wages and the monthly cost of the health insurance benefits for its total labor cost.
Related: What Is Cost of Production?
2. Rent or property purchase costs
The cost of renting property, such as production spaces, office spaces or warehouses, is an operating cost. This includes the total cost of the lease and any additional administrative fees. If a company buys property outright, meaning it pays the full amount all at once, the cost of the transaction is part of the company's operating costs. For example, a tech company buys a production warehouse and a small office space and pays for both in full. The purchase cost, realtor fees and taxes are part of the total operating costs.
3. Advertising and marketing fees
The cost of advertising or marketing products and services is an operating cost that companies can include on a balance sheet. Advertising and marketing expenses like creating social media campaigns, hiring marketing experts or buying local advertisement spaces can make up the marketing costs of a business. For example, a shoe company buys advertisement space in a local mall and hires a marketing firm to help increase its brand awareness. Agency fees and space rent become part of the company's operating costs.
4. Licensing fees
If a business requires specific licensing from the state or other regulatory bodies, it can add these costs to the total operating costs under licensing or regulatory fees. This includes fees for driver's licenses, food service certifications and other regulatory items. For example, a restaurant opens a second location in another city. It can include the fees for health inspection or its vendor's license as part of its total operating costs.
Related: How To Get Your Business License
5. Property taxes
If a business owns the property, it might pay a property tax to the local government. This counts as an operating cost, and the company can include it on the balance sheet. Operational costs also include the total amount for all property taxes and other expenses associated with them, including tax preparation. For example, a marketing firm purchases an office space with a small parcel of land. It might pay a property tax to the local government and include those expenses in its operating costs for review. It may also pay a professional to prepare its tax documents.
6. Utility costs
If a company pays utility bills, such as natural gas, electricity, water, sewage or trash removal, it can include those expenses in the analysis of the operational costs or the balance sheet. These costs typically fluctuate based on usage and market prices. For example, a production warehouse pays $5,000 monthly in utility bills during the winter and $3,200 in the summer. It can include these expenses in its operating costs during both periods.
7. Vehicle maintenance
If a company owns vehicles that require servicing, the cost of that vehicle maintenance is part of its operating costs. Vehicles typically require servicing several times yearly for basic mechanical functionality and safety, so they likely incur costs. For example, a tree removal company owns a fleet of nine trucks. The total maintenance cost of keeping all the trucks operational is part of the company's operating costs.
8. Direct materials costs
The cost of any direct materials, or materials that a company needs to produce its products, is also part of its operating costs. Depending on the market and availability of materials, materials can fluctuate in price, so a company can add the total sum of direct materials for a specific period. For example, a furniture manufacturer might require 1,000 tons of wood each quarter to produce furniture. Wood prices may fluctuate because of availability, and the company might have to use alternative materials to meet demand.
Related: How To Calculate Cost of Inventory
9. Facility or equipment repairs
If a company's facility, equipment or tools need repairs, the sum of those repair costs is an operating cost for the business. This helps businesses track equipment maintenance costs and their properties' integrity and value. For example, a mining company is constantly repairing drills, drill bits and other equipment because of the wearing of materials against heavy stone. Those expenses are part of the company's overall operating costs.
10. Freight in and freight out
Companies also include freight in—the cost of shipping items to a business—and freight out—the cost of shipping goods from a company—in their operating costs. These costs can include third-party vendor fees, shipping fees or the company's fleet costs for shipping items. For example, a bookbinding company produces 10,000 books per quarter and ships each set to a different bookstore. The cost of shipping the materials to produce the books and the cost of shipping the books to the bookstores are part of the company's operating costs.
Operating versus startup costs
While operating costs are often part of a startup cost analysis, startup costs only cover the initial expenses of starting a business. A startup cost analysis helps investors and new businesses explore the costs of starting a new business. Operating costs, however, cover the expenses from the basic operations of a business throughout its lifetime. For example, an organization may calculate its operating costs when it's created, five years after its creation and 20 years since its creation.
Startup companies often include operating costs in their initial estimates to help investors make business decisions. For example, a tech company has high startup costs, low predicted operational costs and a high profit margin. It may be a better investment than another tech company with higher expected operational costs.
Operating costs versus capital expenses
Unlike operating costs, capital expenses aren't part of the business's daily operations. Capital expenses are long-term investments in a company or its products. Some examples of capital expenses are:
New machinery, tools and equipment
Land or buildings
Patents, copyrights or trademarks
Office equipment and computers
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