What Is An Operating Expense? A Guide for Business Owners

As a business owner, you’re no stranger to the numbers game. Understanding where your money goes can help you track your finances, determine your tax obligations, and check your profitability.

But amidst sales forecasts and profit margins lies a term that can often baffle even seasoned entrepreneurs: operating expenses.

So, what exactly are they? 

Think of operating expenses as the heartbeat of your business. It’s not just about revenue; it’s about how efficiently you manage costs day in and day out. 

These costs are essential to running your business, but without proper management, they can quickly eat into profits. 

But with doola Bookkeeping services, you can automate your expense tracking, streamline financial management, and simplify tax filing.

What Is an Operating Expense?

An operating expense (OPEX) is an ongoing cost required to run a business’s day-to-day operations. These expenses are necessary for maintaining business functions but do not directly contribute to the production of goods or services. 

In simpler terms, operating expenses are the regular, ongoing costs that a business incurs in order to keep its doors open. 

They do not include one-time or occasional expenses such as purchasing new equipment or paying off debt. These types of costs fall under capital expenses (more on that in the upcoming section!).

You can also calculate your business’s net income by subtracting your total operating expenses from your revenue. 

Monitoring these costs can help you identify areas where you may be overspending and find ways to reduce them without sacrificing quality. 

This information is also essential for investors and lenders who want to see the financial health of a business before making any investments or loans.

Operating Expenses vs. Capital Expenses

While both are business costs, they serve different purposes and are treated differently in accounting and taxation.

Operating expenses are incurred in the normal course of running a business and are deducted in the same tax year. These costs keep the business functional but do not contribute to acquiring or improving long-term assets.

Capital expenses, on the other hand, are investments in assets that provide long-term benefits. These expenses are not immediately deducted but are capitalized and depreciated over time. 

Businesses invest in capital expenditures to enhance their capacity, improve efficiency, or gain a competitive advantage.

From an accounting perspective, operating expenses appear on the income statement and directly impact net profit. 

In contrast, capital expenses appear on the balance sheet as assets and are depreciated over time.

Another key difference is how these types of expenses impact taxes since operating expenses can be deducted from a company’s taxable income in the year they were incurred. 

However, capital expenditures must be depreciated over time according to specific IRS guidelines.

Common Types of Operating Expenses

Operating expenses are necessary for keeping the business running, and failure to manage them properly can lead to financial difficulties or even failure.

However, businesses incur various operating expenses on a regular basis, which is why we have rounded up some of the most common ones for you.

1. Rent and Utilities: This includes the cost of renting office space or other facilities such as warehouses, factories, etc. It also covers utilities such as electricity, water, internet, and phone bills.

2. Salaries and Wages: Wages, health insurance, retirement contributions, and other employee-related costs fall under this category. This includes not only full-time employees but also part-time workers, freelancers, consultants, and contractors.

3. Supplies: This category covers all necessary supplies needed for day-to-day operations, such as office stationery, cleaning supplies, packaging materials, etc.

4. Marketing Expenses: Any costs associated with promoting a company’s products or services fall under this category. This includes advertising fees, social media marketing costs, website maintenance fees, etc.

5. Insurance: Businesses need insurance coverage, such as liability insurance, property insurance, and workers’ compensation. The premiums paid for insurance policies come under operating expenses.

6. Repairs and Maintenance: All equipment used in daily operations requires regular maintenance or repairs at some point. These costs can add up quickly if not monitored closely.

7. Travel Expenses: For companies that require their employees to travel frequently for work-related purposes, travel expenses can be a significant operating expense item.

8. Professional Fees: Businesses often need external expertise from lawyers, accountants, or consultants, which comes at a cost and adds to the total operating expenses.

9. Software and Subscriptions: Subscription fees paid for business management tools, accounting software, cloud services, and other digital subscriptions are also covered under operating expenses.

How to Track and Manage Operating Expenses

Tracking and managing operating expenses allows business owners to have a clear understanding of the financial health of their company. 

In this section, we will discuss the step-by-step process for tracking and managing operating expenses effectively.

Step 1: Set Up a Bookkeeping/Accounting System

The first step in effectively tracking and managing operating expenses is to have a proper bookkeeping system in place. 

This can be done either manually using spreadsheets or with accounting software that allows you to record all financial transactions related to your operating expenses easily.

All-in-one accounting solutions like doola Bookkeeping automatically categorize expenses, generate financial statements, and ensure compliance with tax regulations.

Step 2: Start a Separate Business Bank Account

It’s crucial to keep your personal and business finances separate when tracking operating expenses. 

Open a separate bank account for your business and use it solely for recording and paying off your operating expenses. 

doola Bookkeeping connects with your bank feeds to automatically import all your bank transactions in real-time, streamlining transaction categorization and reconciliation.

Step 3: Record and Review Regularly

Keep an accurate record of all your costs to ensure that nothing gets missed. Once you have accumulated enough data for monthly bookkeeping, take some time to review your recorded expenses. 

This will allow you to see where most of your money is going and identify areas where you can cut costs if needed.

Look for patterns or trends in your spending habits and identify areas where you may be overspending or areas where you could save money.

Step 4: Set Budgets and Control Costs

Establishing spending limits helps businesses prevent unnecessary expenses and ensures there are enough funds to cover operating costs.

Based on your analysis of past data, set realistic budgets for each category of expense moving forward. 

This will help you control costs and stay within your financial means. Additionally, regularly review your expenses against your set budget to ensure that you are on track.

How doola Bookkeeping Software and Services Can Help

doola Bookkeeping software automatically tracks all your expenses, categorizes them, and generates statements that give you valuable insights into your spending patterns. 

With this information at your fingertips, you can make informed decisions about where to cut costs or invest more resources.

Here’s how it can help you manage operating expenses more efficiently:

• Automated Expense Tracking: doola automatically categorizes your business expenses, making it easy to track where your money is going.

• Real-Time Financial Insights: Gain access to real-time reports and analytics to monitor spending patterns and optimize costs.

• Tax-Ready Bookkeeping: doola ensures your expenses are properly recorded and categorized for tax deductions, helping you maximize savings.

• Seamless Integration: Sync doola with your business bank accounts, payment platforms, and other financial tools for a streamlined bookkeeping experience.

• Dedicated Support: Get expert assistance from doola’s bookkeeping professionals, ensuring that your financial records are always accurate and up to date.

Ready to take the hassle out of managing your operating expenses? 

Book a demo today to see how doola can support your business growth!

FAQs About Operating Expenses

How can I reduce my business’s operating expenses?

To lower costs, consider automating processes, negotiating better supplier rates, outsourcing non-core tasks, and eliminating unnecessary subscriptions.

Are operating expenses tax-deductible?

Yes, most operating expenses are fully tax-deductible in the year they are incurred, reducing your taxable income.

However, depending on your business’s specific circumstances and the applicable tax laws in your country or state, some expenses may only be partially deductible.

How do operating expenses affect profitability?

Higher operating expenses reduce net profit. When these costs are high relative to revenue, it can result in reduced profits or losses for the period.

How often should I review my business’s operating expenses?

It is recommended that businesses regularly review their operating expenses on a quarterly or monthly basis. 

This will help you identify any areas where costs are spiraling out of control and take corrective actions promptly.

Can outsourcing bookkeeping help with managing operating expenses?

Yes, outsourcing to services like doola Bookkeeping ensures accurate expense tracking, reducing financial errors and saving time.

It also allows you to reduce overhead costs associated with hiring in-house staff while still receiving professional and accurate financial management services.