Business expenses are expenses related to doing business and managing the business on a day-to-day basis. The total cost of the business includes the cost of goods sold and the operating expenses of the business. Business expenses are deducted from sales to calculate operating profit and are reflected on the income statement of the business.
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 the business} = {Cost of goods sold} + {Operating expenses}
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 operational costs too much can reduce the productivity of the business and therefore, the profitability of the business is also reduced. While reducing any specific operating costs will often increase short-term profits, it can also affect the profitability of the business in the long run. For example, if a business cuts its advertising costs, their short-term profits will likely improve, as they are spending less money on operating costs. However, by reducing advertising, businesses can also reduce the ability to generate new revenue and profit in the future may be affected.
- 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.
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
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
Fixed costs are costs 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 business must pay factory space rent, regardless of how much it produces or earns. 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 a business's costs are fixed, the business can earn more profit per unit because it generates more units. than. In this system, fixed costs are spread over the number of units produced, making production more efficient as production increases by reducing the average variable cost per unit of production. Economies of scale can allow large businesses to sell the same goods as smaller businesses at lower prices. Economies of scale can be constrained in that fixed costs often need to increase with certain standards in production growth. For example, a manufacturing business that increases production rates over a specified period of time will eventually reach a point where it needs to scale up factory space to accommodate the increase in product output.
Variable costs, or variable costs, include costs that vary with production. Unlike fixed costs, variable costs increase as production increases and decrease as production decreases. Examples of variable costs include material costs, wages, and electricity costs. For example, for a fast-food chain that sells french fries to increase sales, it would need to increase the cost of buying potatoes from the supplier. Sometimes, a business can obtain a discount or rebate when purchasing 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. This, therefore, may somewhat lessen the correlation between an increase or decrease in output and an increase or decrease in the firm's variable costs. Volume discounts usually have a fairly small impact on the correlation between production and variable costs, and the production-level variation of variable costs is unchanged. Typically, businesses with a high ratio of variable costs to fixed costs are considered less volatile, as their profits are more dependent on sales. Except for manufacturing and transportation enterprises with large fixed-cost investments, the majority of trading, construction and service businesses have high variable-cost ratios. However, this is tending to change in the competitive environment and the application of information technology, leading these enterprises to invest more in fixed costs to easily expand and control the quality of supply. .
In addition to fixed and variable costs, the operating expenses of a business can also be considered semi-variable (or semi-fixed). These costs represent a mixture of fixed and variable components, so it can be thought of as existing between fixed and variable costs Partial variable selling cost that varies with increase or decreases in production, as variable costs, but persists when production is zero, as in fixed costs. This is the key factor that distinguishes variable selling costs from fixed costs and variable costs. An example of a semi-variable cost is overtime pay. Recurring wages for workers are often considered a fixed cost, because while businesses can reduce the number of workers and hours worked, they will always need a minimum workforce to operate. motion. Overtime payments are often considered variable costs, since the number of overtime hours a business pays its workers will typically increase as production increases and decrease as production decreases. When the wages paid include overtime pay, then the recognition wages have both fixed and variable components and are therefore treated as semi-variable costs.
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 useful because it promotes efficiency. The result of efficiency is reduced operating costs in areas where managers traditionally use direct labor as a habit. Technology works faster than humans with fewer errors. Technology can also improve the efficiency of supply chain processes, finding ways to reduce things like the cost of transporting materials. To choose the right type of software technology or service 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?
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. A well-trained professional 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 results. better results, because you can't train an expert yourself, you can't 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 that pays dividends gradually over time.
If you work with suppliers regularly, you may want to establish a bid evaluation system for your purchases. If you ask different suppliers to provide you with offers, you will get the best price. Make sure you specify the correct product/service specification, the correct scope of work to request quotes from the suppliers for bidding, as information about your request is missing or when adding or subtracting complexity will dramatically change the price. Having an accurate quote can allow you to better plan for projected operating costs.
Renting an office, paying for office utilities, and managing a physical office can take a huge toll on your finances. Consider allowing your team to work remotely as a way to reduce total costs. With 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, as they can cut down on 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.
You should always be looking for ways to make your business more efficient. By tightening up your processes and procedures, you can reduce waste of both money and time. Encourage your employees to identify inefficiencies and suggest solutions to the problem. Consider providing an incentive for employees to do so. Again, you can consider this an investment in your company. A small bonus for an employee can end up saving you hundreds of millions of dollars.
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.
The potential costs of business are so great, you often put it on a fixed schedule of activities and take it for granted as an expense that you have to pay. Please use the corresponding Expense – Income report template (Not the expense – income statement of the company-wide financial statement) for each individual or department in the business, this will make each department Save unnecessary costs Example: When you look at the Expense – Income statement for a salesperson, you see travel, phone, and reception expenses incurred for 10 customers potential, but those 10 leads don't have any purchases, or have a low purchase rate, or a small purchase value, then this is the area where you need to deal with the effectiveness of your sales pitch. expenditure against the results produced, also known as the Corresponding Expense-Income Statement.
Are you adopting a management style that only tracks business expenses and income without considering the details? If so, now is the time to change that. As your business grows, it will become more and more important to understand things like operating costs. Operating expenses allow you to have an insight into how your expenses affect your bottom line, helping you to improve your financial health. Once you understand your costs, you can use the 7 methods we've provided to start cutting costs and increasing profits.
