As a business owner, do you know that you should categorise the costs that your company has incurred? We can divide the costs into two categories, which are the capital expenditure and operating expenses. In this article, we will shed light on the operating expenses, which are the costs that the company has incurred in the ordinary course of its business operations.

When the accountants from an accounting firm in Johor Bahru are preparing the profit and loss statements for the business owners, they will include the operating expenses as well as other costs that the business has incurred in that statement. The operating expenses do not cover the expenses like the cost of goods sold (COGS) that is directly related to the goods or services the company has provided to its clients.

The Selling, General and Administrative expenses, cost of goods sold, as well as management expenses, are some operating expenses that most companies will normally incur. The Selling, General and Administrative expenses include the costs the company has spent on advertising, marketing, promotional materials, sales (Also see Are Sales and Revenue the Same?) commissions, utilities, rent, utilities and others. Some examples of the cost of goods sold are factory overheads, labour costs, inventory cost, and so on. Lastly, the management expenses comprise of the management and staff compensation and other costs that do not fall under the category of cost of goods sold.

Understanding operating expenses is crucial to business owners as this expense is an essential element in the process of calculating the operating profit, which they can use for the calculation of net profit. A low operating expense indicates that the company has high profitability. The calculation of net profit involves three elements, which are the operating profit, interest expense, as well as the amount of taxes paid. Firstly, business owners should take the net sales, less the operating expenses and cost of goods sold to arrive at the operating profit. To calculate the net profit, they need to minus the interest expense and taxes paid from the operating profit generated.

Note that various factors may bring an impact to the operating expense. Some examples of those factors include the prices of raw material, labour costs, pricing strategies, and so on. These expenses (Also see How Can Good Accountants Help in Growing Your Business and Reducing Your Expenses?) are part of the financial decisions that the managers would make in the daily operations of the business. Thus, some people may take the operating expenses as one of the measures of the competency and flexibility of the management, particularly during the economic depression. Also, business owners may use the operating expenses (Also see Differentiating Capital Expenditures and Operating Expenses) to do some calculations so that they get to know the financial performance of their business in that period. Apart from calculating the operating profit (as what we have mentioned above), we can also calculate the operating expense ratio by using the operating expenses. This is a measure which helps the business owners to assess the part of income their companies have consumed to run normal business operations. To calculate this ratio, they need to divide the operating expenses with the company’s net sales. Also, they can use this ratio to compare companies that operate in the same industry.