What is an operating expense?
An operating expense is an ongoing expense for running a business or system. It is a day-to-day expense such as administration or cleaning. A short explanation would be that it is the money a business spends in order to turn its inventory into throughput.
On an income statement, operating expenses is the sum of a business’ operating expenses for a period of time such as per month or even per year.
In throughput accounting, the operating expenses is the money spent turning inventory into throughput. In Theory of Constraints, the operating expenses is limited to costs that vary strictly with the amount of goods that are produce. Everything else is at fixed costs and this includes labor.
Operating expenses include:
- Accounting expenses.
- Licensing fees.
- Maintenance and repairs.
- Office expenses.
- Attorney and legal fees
- Utilities like telephone or ADSL.
- Property management.
- Property taxes.
- Travel and vehicle expenses
- Leasing commissions.
- Salary and wages
Why is operating expenses important?
Operating expenses are a key component in calculating operating income. Operating income is in turn a crucial component of many financial measures. The lower a company’s operating expenses are, the more profit it will usually make.
Several things can affect your operating expenses such as your pricing strategy, prices or raw materials or labors costs. These items are directly related to the day-to-day decisions that the managers make. Your financial measures are also based on operating expenses are also measures of managerial flexibility and competency, especially during a tough economic situation.
It is also important to note that some industries do have higher operating expenses than others. That is precisely why you compare your operating expenses and your income. It is the most meaningful among companies within the same industry. Your “high” and “low” expenses will also be made within this context. One business from the medical industry cannot relate to a business in the defense industry.