A business's operating expenses are the costs associated with running and managing a business on a day-to-day basis. A business's total expenses include the cost of goods sold and the business's operating expenses. A business's expenses are deducted from revenue to calculate operating profit and are reflected on the business's income statement.

1. Formula for calculating business operating costs

Use the following formula to calculate the cost of the business. You will find this information from the business's income statement in the company's financial statement set for the specific accounting period.

{Cost of business} = {Cost of goods sold} + {Operating expenses}

From the income statement of a business, you can only see the total cost, but you have to find out what its details include and where it came from to see that your money was. where it flows, whether it is effective or not.

2. Decoding business operating costs

Businesses must keep track of related costs incurred when businesses are operating and related costs incurred when businesses are inactive.

• Because profit is determined by the revenue the business earns minus the amount it runs, profits can be increased by increasing revenue and reducing operating costs. Because cost cutting often seems to be an easier and more accessible way to increase profits, managers will often quickly choose a cost-cutting method.
• However, cutting operating costs too much can reduce a business’s productivity and therefore its profits. While reducing any particular operating cost will usually increase short-term profits, it can also affect a business’s profits in the long term. For example, if a business cuts advertising costs, their short-term profits will likely improve, as they are spending less money on operating costs. However, by cutting advertising, the business may also reduce its ability to generate new revenue and future profits may suffer.
• Ideally, businesses should find ways to keep operating costs as low as possible while maintaining the ability to increase sales. In order to do this, managers need to understand operational costs and how to manage operating costs effectively.

2.1. Cost of goods sold

These are direct expenses associated with producing finished goods, purchasing goods for sale, or direct expenses for the provision of services, including the following expense items:

• The cost of materials directly
• Cost of renting a factory or manufacturing facility
• Salary for production workers, production managers
• Depreciation of machines and equipment
• Cost of repairing machines and equipment
• Electricity and water costs used for production facilities
• Consumption costs for the use of production facilities

2.2. Operating expenses of the business

Operating expenses of an enterprise include the following types of expenses:

• Salary for management department
• Salary for accounting and tax declaration department
• Salary for personnel management department, labor and insurance wages
• Salary for the legal department
• Selling and marketing expenses
• Bank charges
• Travel expenses
• Entertainment and communication costs
• Research and development costs
• Office rental costs
• Expenses for consumer consumption in the office
• Cost of repairing and maintaining office machines
• Cost of electricity, office water

2.3. Fixed costs (Fixed costs)

Fixed costs are those that do not change with an increase or decrease in sales or productivity and must be paid regardless of the operation or performance of the business. For example, a manufacturing enterprise has to pay rent for factory premises, no matter how much it produces or makes.

While it can narrow and reduce the cost of rent payments, it cannot eliminate these costs and so they are treated as fixed costs. Fixed costs usually include initial investment costs, property insurance, security and installation equipment.

Fixed costs can help achieve economies of scale, because when more of your business costs are fixed, businesses can make more profit per unit because it creates more units. than. In this system, fixed costs are spread evenly across the number of production units, making production more efficient as production increases by reducing the average variable cost per unit of production. Economic scale can allow large businesses to sell similar goods to smaller businesses at lower prices.

Economies of scale-based may be limited in that fixed costs often need to increase with certain standards in production growth. For example, a manufacturing enterprise that increases production rates over a defined period will eventually reach the point where it is necessary to increase the size of the factory space to accommodate the increase in product output.

2.4. Variable costs (Variable costs)​

Variable costs, also called variable costs, include costs that vary with production. Unlike fixed costs, variable costs increase as production increases and decreases as production declines. Examples of variable costs include material costs, wages and electricity costs. For example, for a fast-food restaurant chain to sell chips to increase sales, they will need to increase the cost of buying potatoes from the supplier.

Sometimes, a business may achieve a discount or a discount when buying supplies in bulk, where the seller agrees to slightly reduce the cost per unit in exchange for a regular buyer's purchase agreement. buy in bulk. Therefore, this may partially reduce the correlation between increasing or decreasing output and increasing or decreasing variable costs of the firm.

Volume discounts often have a relatively small effect on the correlation between variable costs and variable costs and the nature of change in the variable production level is constant.

Typically, firms with a high ratio of variable costs to fixed costs are considered to be less volatile, as their profits depend more on sales. Except for manufacturing and transport enterprises that have large fixed investment costs, most of the trading, construction and service businesses have high variable rates. However, this is changing in the competitive environment and the application of information technology has led these businesses to invest more in fixed costs to easily expand and control the quality of supply. .

2.5. Variable selling costs (Variable selling costs)

In addition to fixed and variable costs, a firm's operating costs can also be considered selling variable costs (or selling fixed costs ”).

These costs represent a mixture of fixed and variable components, so it can be thought of as a coexistence between fixed costs and variable costs. reduce in production, as variable costs, but persist when production is zero, as fixed costs. This is a key factor distinguishing variable selling costs from fixed costs and variable costs.

An example of variable selling costs is overtime pay. Regular salaries for workers are often considered as fixed costs, because while businesses can reduce the number of workers and their paid working hours, they will always need a minimum workforce to operate. dynamic. Overtime payments are often referred to as variable costs, because the overtime a business pays its workers will often increase as production increases and declines as production declines. When wages are paid with overtime pay, the recognition wage is both fixed and variable and is therefore considered variable selling expenses.

3. Useful management solutions for business operating costs

3.1. Technology application​

There are many systems and software programs online that can automate and streamline your business operations. These systems can cover a wide range of departments, including accounting, payroll, marketing communications, customer interaction and relationship management, service quality control and customer care, sales projections and operating budgets etc.

Technology is very useful because it promotes efficiency. The result of efficiency is reduced operating costs in areas where traditional managers often use direct labor as a habit. Technology works faster than people with fewer errors. Technology can also improve the efficiency of supply chain processes, looking for ways to reduce things like material costs.

To choose the type of technology or software service that's right for you, ask yourself the following questions:

• What am I good at? And I'm not good at anything? For example: If you are a person with knowledge and an accounting background, you probably won't need the financial accounting technology right away, but you might need the technology to market it. There is a very important point here: you tend to invest in technology with what you are mastering, for example, if you have a financial and accounting background, you invest heavily in technology. managing accounting and finance, because it makes it easy for you, while you should prioritize investing in what you are weakest to balance the strength of your business, such as media technology automatic marketing.
• What makes me find myself spending too much time each week?
• If I could eliminate one of my most time-consuming tasks, what would it be?

Your answers to these questions will give you a clear indication of the task or subject area that you should use technology for.

3.2. Outsourcing (Outsourcing)

Another option to improve efficiency is to outsource certain business activities to a third-party specialist. For example, if you don't have a background in accounting or tax law, you may find it difficult to identify ways to manage your finances, or you may not be able to reduce your taxes. Outsourcing Comprehensive tax accounting services, a well-trained expert in this field can assist you.

While it may seem like hiring an outside vendor will lead to more money spent, in the long run, assigning specific tasks to experts in that field will save you money and generate revenue. better results, because you can't train an expert yourself, you can hardly afford to hire a real expert, while only an expert can advise you on the best in each field.

Outsourcing certain activities is an investment in which you pay dividends gradually over time.

3.3. Search for better prices for the same product or service​​​​​​​​

If you work with suppliers often, you may want to set up a bidding rating system for your purchases. If you ask different suppliers to offer you the price, then you will choose the best price.

Make sure you specify the specification of the full product / service, the correct scope of work to request a quote for suppliers to bid, because information about your request is missing or when You add the complexity will significantly change the price.

Having an accurate quote can allow you to better plan for expected operating expenses.

3.4. Change the way of communication in business

Renting an office, paying utility costs and managing a physical office can cost you a lot of money. Consider allowing your team to work remotely as a way to reduce overall costs.

Given the number of connections available today, the difference between an employee sitting in the office and sitting at home is almost imperceptible. Employees will often find this advantage because they can cut their travel time and costs.

To determine the cost and time loss of physical interaction face to face, do the following two things:

• Calculate the time your staff prepares, moves to get a face-to-face meeting, sometimes you will see a meeting that will take you and your team at least 1 to 2 hours to prepare. being relocated and relocated, and at a considerable cost.
• Make a list of activities that can communicate via Video call without having to "see a physical partner", then increase your online communication from 1%> 10%> 20% ... 30% but your job remains unchanged, even better, then the success of this job will surprise you because of its effectiveness.

3.5. Identify which areas of the business are not working

You should always find ways to make your business more efficient. By tightening your processes and procedures, you can reduce waste of money and time.

Encourage your staff to identify inefficiencies and suggest solutions to problems. Consider providing an incentive for employees to do so. Again, you can consider this as an investment in your company. A small reward for an employee that can ultimately save you hundreds of millions of dong.

3.6. Canceling unused services​

Check your fee list and identify services you are no longer using. If you haven't used them for a few months, look for a cheaper package or consider canceling them completely.

3.7. Request a corresponding Expense – Income statement​

The potential cost of the business is huge, you usually put it on a fixed schedule and assume that it is an expense that you have to pay.

Use the corresponding Cost - Income report form (Not the expense - income statement of the company-wide financial statements) for each individual or department of the business, this will work for each department. No cost saving department

For example: When you look at the Sales - Earnings report of a salesperson, you see the costs of travel, telephone, and receptions incurred for 10 potential customers, but 10 potential customers. If there is no purchase, or a low purchase rate, or a small purchase value, then this is the area where you need to deal immediately with the efficiency of spending compared to the results generated. out, otherwise known as the Expense - Income Report.

Attention

What if you are practicing a management style that only tracks business expenses and income without looking into the details?

So it's time to change that. As your business grows, understanding things like operating costs will become more and more important.Operating expenses allow you to gain insight into how your expenses affect your profits, helping you improve your financial health. When you understand your expenses, you can use 7 methods which we have provided to start cutting costs and optimizing profits.