An explicit cost is a payment associated with running a business that can be clearly defined and identified. Explicit costs reduce the profit a company makes by consuming the company's bottom line. Some examples include rent, utility payments, wages, materials, services, and taxes. All these costs are concrete and can be easily accounted for in the financial statements. In contrast to an explicit cost, an implicit cost is a more nebulous cost associated with the cost of a lost opportunity to the business or owner.
Some explicit costs are fixed and contracted. Rents are an excellent example of this type of cost. When a company leases a facility, they enter into a contract that sets out the terms of the lease, and that contract includes fixed payments to the lessor. You can renegotiate leases and change contract terms in the future. An explicit cost, such as a utility bill, tends to be recurring just like rents and can be fixed or variable, depending on the utility involved.
Other explicit costs are one-time expenses. If a company invests in new equipment to replace old or obsolete equipment, this is a one-time type of explicit cost. Likewise, companies may pay from time to time for services such as legal or accounting services that provide a benefit to the company. Services like these can be repeated in variable interviews; a small business may periodically consult an attorney, for example, but cannot hire a retention attorney.
With explicit costs, it's easy to see the purpose of the expense and track the outputs. This is used in financial statements to summarize the company's financial position and show whether it is making money or making a loss. These disbursements of funds can benefit the business in the long run and are part of the operating costs of the business. Businesses must spend money to function and they must also be able to make decisions about incurring additional expenses that allow them to expand and grow.
Implicit costs, on the other hand, are costs associated with the choices the company makes. No money changes hands, but a company has missed opportunities and this leads to declining profits. An example of implicit cost can be seen when a company volunteers for a day for a public cause. This represents a lost day of paid work, although it has other benefits such as building goodwill in the community. Lost investment opportunities as a result of having funds tied to the business are another example of an implied cost. This type of cost is more difficult to calculate than an explicit cost.