Operating Expenses

By Entrepreneur Staff

Pencil

Operating Expenses Definition:

The selling and general and administrative expenses incurred by a business

Although different businesses have different costs associated with them, the main operating expenses of most businesses include:

Rent. Under many lease agreements, you'll be expected to provide the first month's rent plus a security deposit. Many leasors also require the last month's rent.

Phone and utilities.

Equipment. Equipment costs vary from one business to another. At a minimum, most businesses need office equipment, signage, and security systems. To determine your costs, list all the equipment you must have to efficiently operate your business.

Fixtures. This broad category includes partitions, paneling, signage, storage cabinets, lighting, checkout counters, and all shelves, table stands, wall systems, showcases, and related hardware for product display. The cost of fixtures depends on your business location, the size and condition of your facility, the type of business you're in, what kind of image you want it to project, and whether you're purchasing new or used fixtures.

Inventory. Like equipment, inventory requirements vary from business to business. Some businesses, such as retail stores, are inventory-intensive, whereas others, such as personal shopping services, don't require any inventory at all except office supplies.

Leasehold improvements. These nonremovable installations, either original or the result of remodeling, include carpeting and other floorings, insulation, electrical wiring and plumbing, bathrooms, lighting, wall partitions, windows, ceiling tiles, sprinkler systems, security systems, some elements of interior design, and sometimes heating and/or air-conditioning systems. Because the cost of improvements can vary tremendously, get several estimates from reputable contractors.

Licenses and tax deposits. Most cities and counties require business operators to obtain various licenses or permits to show compliance with local regulations. Licensing costs vary from business to business, depending on the requirements of your particular location.

Marketing budgets. Most companies determine their first year's advertising budget as a percentage of projected gross sales, typically two to five percent.

Professional services. Generally, this refers to your lawyer and accountant. Their fees will range according to their expertise, and the location and size of their practices.

Payroll.

Insurance.

A word of caution when estimating these costs: If there's ever a time to be conservative, it's now. Err on the high side when you project expenses, and on the low side when you project revenue. And don't forget to add a "rainy day" or contingency fund to cover the costs of unforeseen expenses-somewhere around five percent of your budget is a typical amount to set aside. This financial cushion will help you-and your investors-avoid panic in case you're faced with an expense you hadn't budgeted for.

More from Accounting

Cash Flow

The difference between the available cash at the beginning of an accounting period and that at the end of the period. Cash comes in from sales, loan proceeds, investments and the sale of assets and goes out to pay for operating and direct expenses, principal debt service, and the purchase of asset

See full definition

Cash Flow Statement

A financial statement that reflects the inflow of revenue vs. the outflow of expenses resulting from operating, investing and financing activities during a specific time period

See full definition

Cash-Basis Accounting

An accounting system that doesn't record accruals but instead recognizes income (or revenue) only when payment is received and expenses only when payment is made. There's no match of revenue against expenses in a fixed accounting period, so comparisons of previous periods aren't possible.

See full definition

Accountant

A person whose work it is to inspect, keep or adjust accounts

See full definition

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