Understanding Operating Expenses and Related Concepts

Understanding Operating Expenses and Related ConceptsWhen going through the company’s finances, one will often encounter the phrase ‘Operating Expenses’ alongside many other expenditure types that together amount to the company’s overall expenses. In turn, total losses subtracted from the income would be the company’s profits for the period.

Operating Expenses are often the biggest type of expenditure a company bears over the course of one month. They include everything the business has to spend money on in their main line of work – their operations. That’s why the Operating Expenses (aka OPEX) are specific to a company, while non-operating expenses are not.

What are Operating Expenses?

If a venture has to spend money on something related to their legal main activity, then this would likely be an operating expense. So, the most common types of OPEX are:

  1. Buying equipment
  2. Buying inventory
  3. Recruiting labor
  4. Paying salaries
  5. Marketing
  6. Insurance
  7. Rent.

Basically, everything you need to pay for to keep your business running is a part of your Operating Expenses, as opposed to the capital expenses and other non-operating expenditures.

You can usually find the precise numbers on all of these in the monthly income reports issued by the company. These also include non-operating and capital expenditures, amortization, administrative costs, selling, and others.

Naturally, many of these spendings (including the OPEX) can be necessary or simply helpful for the business. Either way, by paying operation expenses, you’re supposed to improve the effectiveness and the economy of your business. However, many companies instead opt to reduce the costs, which isn’t always healthy in the long run.

Reducing expenses is common practice with businesses on all levels. Accounting is often tasked with figuring out how to decrease the expenses in this field. It usually includes removing unnecessary expenditures and optimizing the expenses (in better scenarios). Sometimes, it only involves cutting corners and saving on essentials.

Suffice it to say, the latter approach isn’t too healthy for the business. It’s much better to save on capital expenses, since the livelihood of the company doesn’t directly depend on them, most of the time.

What isn’t Operating Expenses?

The second most common expense type includes capital expenses. These are payments a business makes as an investment. Many of them can directly improve the efficiency of the company, although many still are just unnecessary and made in hopes of improving the financial situation.

The most effective non-operating expenses are usually tangible. Better equipment, real estate, technology are examples of tangible equipment. The intangible expenses aren’t particularly necessary. They can improve the finances, but they are unreliable. Acquisition of assets, trademarks, and copyrights are examples of that.

Apart from capital expenses, there are also amortization and depreciation costs. Depreciation costs are losses associated with your inventory wearing off and losing value. Amortization is very similar, but is often applied to non-tangible property. For all intents and purposes, however, they are part of the same.

Among the less exciting costs are also income taxes and other taxes. They are also featured on the monthly income reports, and they are also manageable. You can reduce them through a variety of means, but they are the most depressing because you don’t gain anything from paying these.

Among all of them, however, the Operating Expenses are the most common and largest by far.

Understanding Operating Expenses and Related Concepts

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