The old saying goes “you’ve got to spend money to make money,” and, of course, it’s true. From the costs associated with an office or shop location to insurance fees, payroll, and even office supplies, there are a lot of expenses associated with running a small business.
But if you really want to understand your bottom line, you need to organize and understand your operating expenses. That’s why today we’re clearing up exactly what is (and isn’t) an operating expense, and how you can calculate yours.
And, because we know you’re probably here not only to learn about operating expenses, but to try to reduce yours as well, we’ve got five tips to help you do exactly that.
Want to fast-forward to the money saving part? No problem—just skip ahead:
- What exactly are operating expenses?
- What is not included in operating expenses?
- How do you calculate operating expenses?
- 5 tips to reduce your small business operating expenses
💸 What WFH expenses should you look for when you’re managing your finances? We collaborated with Bench, an online bookkeeping service, to create this guide that’ll come in handy as you’re looking through your operating expenses.
What exactly are “operating expenses”?
Operating expenses, sometimes abbreviated as OpEx, are the costs that your business incurs that keep it running that aren’t related to the production of a product.
According to the IRS, these operating costs must be ordinary (common and accepted in the trade) and necessary (appropriate to the business) in order to qualify as operating expenses.
If your business files taxes in the United States, you’ll want to track and document your OpEx because they are tax deductible!
Operating expenses include things like:
- Building maintenance and repairs
- Property taxes
- Office supplies
- License fees
- Advertising and marketing
- Travel expenses
- Accounting and legal fees
What is not included in operating expenses?
Most of what automatically comes to mind as you think about the costs of running a business qualify as operating expenses. But there are some technicalities to be aware of, and a few expenses don’t fall under this umbrella.
First of all, the cost of goods sold (including materials and manufacturing) does not qualify as an OpEx. Neither do capital expenditures like buildings or machinery.
Other non-operating expenses include:
- Bank fees and interest charges
- Lawsuit settlements
- Currency exchange fees
- Restructuring costs
- Obsolete inventory
That doesn’t mean that these aren’t costs your business has to deal with—they absolutely are. But there is a distinction in the way these costs are handled when you file your taxes, so it’s important to keep track of operating expenses separately.
Plus, as we’ll discuss later, when you’re looking to save money in business, the best way to do so is to actually look at your operating expenses separately from other expenses. These are usually the easiest to reduce to make a real impact on your bottom line.
But we’re getting ahead of ourselves. Now that we know what is and what isn’t an operating expense, you’ll need to calculate your OpEx.
How do you calculate operating expenses?
Obviously, now that you know what is and what isn’t an operating expense, it should be pretty easy to categorize your expenses, as long as you keep good records or use a software that helps with bookkeeping.
But, like all numbers in business, your operating expense total only makes sense within a larger context. Once you know your operating expenses, examine them within the context of your revenues.
To get an operating expense ratio (OER), add your cost of goods sold (COGS) to your operating expenses. Then, divide by your revenue to get a percentage of revenue that you’re spending on these expenses—an operating expense ratio.
COGS + OpEx / Revenue = OER
Now you can look up average operating expense ratios for your industry to see how your business is doing in comparison.
Want to dig deeper into your numbers? For your software expenses, try using our new cost of ownership calculator to see how much you can save not only by lowering software expenses, but also through an increase in productivity among your employees so you can stop losing money to lost opportunities.
5 tips to reduce your business’ operating expenses
Expenses are an unavoidable part of doing business—you need to keep the lights on, after all. So why focus on reducing operating expenses?
Well, an increase in operating expenses cuts into your profits, while reducing operating expenses allows your business to make more money.
As a business (and especially if you’re small business), when you’re looking to improve the bottom line, operating expenses are the first place to turn. That’s because they frequently are less fixed than, say, production costs.
Plus, while a reduction in production costs might also be able to help your bottom line, it could be at the expense of quality. And while you may be able to increase your prices to make more money, you may also jeopardize sales at a higher price point.
Therefore, operating expenses are generally where you’ll look when it’s time to save some money in your small business. Luckily, since operating expenses cover so many business costs, there are a lot of ways to experiment and try to reduce them.
We’ve assembled some of our favorites below.
1. Consider remote work options
One major operating cost for small businesses is the cost of space—rent, utilities, and maintenance are a major line item for businesses that choose to operate out of a physical location.
For some companies, like clinics and shops, it may not be possible to work remotely, but if you’re paying for an office space, you may consider remote work to save on your bottom line.
Especially in the era of COVID-19, more and more workers are accustomed to working remotely. And, with remote work tools like team messaging and video calling, there’s no reason why your business can’t stay just as connected as they would in the office. For example, RingCentral’s desktop and mobile app gives you messaging, video conferencing, and a phone system—all in one app:
Just be sure to work intentionally to support a company culture of collaboration and communication, even when your team isn’t in the same physical space.
2. Reduce travel costs
There are some jobs that absolutely need to be done on location, and then there are meetings that don’t necessarily need to happen in person. Examine your company’s travel expenses and consider whether you can cut back on in-person meetings and sales calls to reduce travel costs.
Whether or not your team works remotely, video calling is still a great option for connecting with leads, holding important meetings, and, yes, even closing deals.
If you haven’t tried video conferencing software for business lately, you might be surprised by the quality. With HD video calling, great quality audio, and screen sharing with annotation features, a good platform can help your business project a professional image while hosting meetings virtually. Again, RingCentral’s app gives you the ability to do that in your video conferencing calls:
3. Add up your subscription costs
Recurring costs are one of the easiest ways that money slips out of many businesses’ coffers without anyone noticing.
Take a look at your bills and look at all of those subscriptions that automatically charge you every month or every year. Then, start examining your team’s usage of each of your subscriptions. You might be surprised by how little you’re actually using some of the subscriptions you’re paying for.
One good rule of thumb, especially as a growing business, is to choose software solutions that do more than one thing well.
For example, as opposed to having one tool for video conferencing, another for file sharing, and another for calling, find one platform that can do them all. It’s actually not as hard as it sounds! Tools like the RingCentral app can handle all of that (and more), plus it even comes with unexpectedly handy features like the ability to switch from a phone call to a video call with just the tap of a button:
There are plenty of cheap software options that seem like a good deal now—but if you go with a tool that only does one thing, you’ll gradually need to add more tools to get the functionality you need anyway. And when you add all of them up, often you’ll find that you’re spending more than you would’ve by using versatile software that can keep your tech stack more streamlined.
This way, you’ll not only save yourself from having to shop for new software all the time, but you could also reduce your financial burden and operating expenses overall.
Plus, when you have that many software options for your team to work with, it’s unlikely that they’ll actually all get used to the fullest extent. How much time do you need to spend on training team members on different apps? How much time and mental effort is your team wasting when they have to switch between different platforms and windows all day long?
Choose versatile software so you can waste less time training your team, avoid subscription creep, and spend less on SaaS product fees.
🕹️ Get a hands-on look at how RingCentral can streamline the number of tools you’re paying for by booking a product tour:
💰 You can also use this calculator to see roughly how much your business could save by using RingCentral to support your team’s communication with each other—and clients.
4. Shop around and pay on time
Examine your operating expenses and ask yourself—do you think you’re getting a good deal?
By shopping around for things like technology, insurance costs, and even building maintenance, you can end up saving a lot. Don’t be afraid to get quotes from competitors of the vendors you’re using now, just to be sure you’re paying a fair price.
You might also ask vendors you work with often if they can offer a discount for invoices paid early or upfront in full.
Keep an eye out for special promotions that will price match for your company—it never hurts to ask!
As a small business, hiring any employee represents a significant operating expense. If the cost of payroll is a major percentage of your operating expenses and you’re trying to avoid costly new hires, consider outsourcing or hiring freelancers.
By working on a per-project basis with an expert in the field, you can get the high-quality work you expect for a rate that’s much more budget-friendly than an annual salary.
Plus, you’ll have the opportunity to work with someone who is specialized in exactly what you need them to do—whether it’s marketing or accounting—rather than hiring a generalist to work full time.
Of course, once you start to have freelancers working nearly full time for you, or have to hire multiple freelancers to do the same thing, it may be time to consider a full-time hire.
But for tasks that are highly seasonal, like filing your taxes, or just don’t require a full time employee for your company right now, outsourcing can be a great option for reducing operating expenses.
How will you cut down your operating expenses?
Once you understand what is and isn’t an operating expense for your small business, it’s easy to see why this category is critical for your bottom line. By finding creative ways to reduce expenses, you’re able to keep product quality high and prices fair while still making more money overall.
Luckily, reducing expenses doesn’t have to be a headache. Just understanding where you’re starting, reducing unused subscriptions, and spending smart going forward can make a huge difference in reducing expenses for your small business.
Originally published Nov 03, 2020, updated Dec 18, 2020