CandleFocus

Operating Expense

Candlefocus Editor
Operating expenses are the costs associated with a business’s daily activities and are also known as ‘earned expenses’ or ‘cost of goods sold’ (COGS). They are necessary for running a business’s primary activities and can include such costs as labor, materials, insurance, rent, utilities, transportation, and advertising. Operating expenses are normally associated with sales—the higher the sales, the higher the expenses; However, not all expenses are directly traceable to sales.

Rent can also be considered an operating expense depending upon the business. Companies typically have to pay rent for the office space or stores that they're using. If rent is overhead, it should be spread out over the entire year, unlike other expenses that are paid for in larger spurts like inventory.

Equipment costs such as computers, machinery, and other types of machinery necessary to conduct business can also be considered operating expenses. Even if these pieces of equipment last many years and require little maintenance, depreciation should be taken into account.

Marketing is a necessary expense for spread awareness of a business and its products. This expense can take many forms such as direct mailing campaigns, advertisements, television commercials, radio spots and online marketing.

Payroll is a large part of operating expenses, as businesses must pay their employees in order to stay operational. Payroll costs also include associated fees like worker's compensation, health insurance, and taxes.

Insurance is a necessary expense for covering workplace accidents, computer viruses, and other risks. It’s important for businesses to budget for their insurance costs as these costs can be unpredictable

Step costs are changes made to operating expenses in the course of achieving a specific goal. Businesses tend to reduce or modify operating expenses in order to meet deadlines or to streamline processes

Finally, research and development (R&D) expenses are necessary for most businesses that are constantly trying to innovate and stay ahead of the competition. Investment in R&D increases a business’s long-term value and helps it remain competitive in the market.

In conclusion, operating expenses are an integral part of any organization’s budget and are necessary for keeping a business running. From rent and equipment, to payroll, marketing and research and development, businesses must carefully consider the importance of operating expenses in order to succeed. Being aware of operating expenses can help businesses plan for the future and meet their long-term goals.

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