If you have just started putting up a small business or are thinking of setting up one, it would make sense to understand and appreciate one of its most critical aspects – the costs involved in operating it.
What Are Operational Costs?
In simple terms, operating costs are expenses related to the running and management of a business. They are sometimes referred to also as the expenses in operating a device, a machine or a piece of equipment. These are the costs of resources use by an organization to maintain its existence.
The Two Categories Of Operating Costs
For any business enterprise, there are two types of operating costs:
- Fixed costs – These are costs incurred whether a business is operating at full or fifty percent (50%) capacity or even if it is completely closed. A clear example of a fixed cost is the rent of the building where the business operates or mortgage payments. These will require payment regardless of the status of the business.
- Variable costs – There are costs that fluctuate. These are what are known as variable costs. They may change from week to week or month to month. They either go up or down depending on whether more production is done and how it is done. An example would be the production done over a period of ten normal days would tend to be lower than if the same production is done for seven days but with overtime. These variable costs would typically consist of overhead costs like cell phone services, supplies for the computer, electric power and other utilities, payroll services, office and janitorial supplies, express mail and credit card processing, etc.
Operational cost is computed based on the cost of goods sold by a company. They would consist of:
- Administrative and office expenses, such as staff salaries, rent, insurance and directors’ fees.
- Selling and distribution expenses which would include salaries of sales persons and promotions staff and advertising costs.
- The cost of raw materials used for goods sold, production wages and shipping costs.
You’ll have to face it. It will cost you money to operate a small, medium-size or big business. You will have marketing and administrative costs, which together make up your operational costs. When you’re faced with these costs and you get the chance to examine and assess them in detail, you will, by necessity find ways and means to keep them at a minimal level and evaluate the true effectiveness of the dollars you’ll spend to keep the business running.
You should also appreciate that part of your operational cost would include the value that you lose every month on vehicles, buildings, equipment and office furniture. When you do your accounting at the end of each month, depreciation of these items will count as operational expense. It’s important because when you pay your annual taxes, the Internal Revenue Services will allow you to write off depreciation. And rightly so, because you would have lost value on your assets when you decide to sell them sometime in the future.