5 things you need to know about operating costs
Operating costs are calculated by adding up what your business spends to keep running day-to-day. When you know your operating costs, you can make smarter decisions about where and how to allocate your resources and manage your finances more effectively.
In this guide, you'll learn about the different types of operating costs, how to calculate them and why it's important to keep an eye on those numbers.
1. Operating costs vary between businesses
What you classify as operating costs will vary depending on what your business does day-to-day. For example, if your core business is focused on buying and selling properties, you’d classify the real estate agent or marketing fees as operational — they're an essential part of the daily operations. If you run a plumbing company, however, those expenses won’t be operational, because they’re not essential to your day-to-day. Instead, you might classify new equipment or storage costs as operational.
2. Operating costs are different to operating expenses
While many business owners refer to operating costs as operating expenses, there's a distinction between the two.
Operating costs are everything you spend to be in business, including operating expenses – from paying for rent and utilities to covering raw materials or delivering your service.
Operating expenses are anything you spend that's not directly related to creating your product or delivering your service.
In short, operating expenses are just one part of your operating costs.
3. There are three different types of operating costs
There are three types of operating costs: fixed, variable and semi-variable.
Fixed costs stay the same month to month — you know exactly how much you'll be spending on salaries and rent, for example.
Variable costs can change. For example, wages and manufacturing costs go up when you sell more products, or you might spend more on marketing to make the most of a holiday period.
A semi-variable cost is generally fixed, with some variation — say you've negotiated a set fee for office cleaning but then choose to pay for deep cleaning at the end of the year. Other changes can happen when you hit a specific limit — perhaps your workflow software allows for ten people, and adding an eleventh means paying for the higher, more expensive tier.
4. Operating costs are different to non-operating costs
The difference between operating and non-operating costs is whether or not the costs are directly associated with the day-to-day running of your business. Non-operating costs are generally one-offs.
Examples of non-operating costs
Inventory write-offs, such as when items are deemed obsolete or become damaged
Disposing of assets like equipment or property
5. Understand operating and non-operating costs to help predict performance
For a clear understanding of how your business is performing, it makes sense to record operating and non-operating costs separately. If your business is running at a loss, you can see if this is a fundamental problem — that it isn’t profitable — or if these negative numbers come from a one-off non-operating expense.
This clarity makes it easier to track your core business performance over time and more accurately predict your future performance.
Operating costs FAQs
What do operating costs not include?
Operating costs do not include any expenses that don't directly relate to your core operating activities. These tend to be one-off.
What are some real-world examples of operating costs?
Suppose you run a building company. Your operating costs will include everything you need to function day-to-day, including your staff, timber, the lease payments on your trucks, insurance and your HQ tea and coffee supplies.
What are the risks associated with cutting operating costs?
While cutting operating costs can help improve your profitability, there are risks you should consider. Downsizing your staff levels or using cheaper materials can impact customer satisfaction and your company’s long-term viability. You may also uncover hidden costs associated with cheaper options. For example, cheaper software may take more staff time, or lower-cost premises may increase travel expenses.
How to calculate operating costs
Calculating operating costs is simple: add your COGS (or cost of sales), including labour, materials and overhead, to your operating expenses, such as rent, utilities, admin and marketing.
Operating costs = cost of goods sold + operating expenses
Better tracking, smarter decisions
Understanding your operating costs gives you a clear picture of your business performance. They show what you’re spending and where so you can see where you're allocating the most resources and if there's an opportunity to be more efficient and increase profits.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.