What Does operating costs Mean
The notion of operating expenses refers to the money disbursed by a company or organization in the development of its activities. Operating expenses are salaries, rental of premises, purchase of supplies and others.
In other words, operating expenses are those intended to maintain an asset in its existing condition or to modify it so that it is again in proper working condition.
The registration of operating expenses is important to know the economic status of a company.
Types of operating expenses
Operating expenses can be divided into administrative expenses (salaries, office services), financial expenses (interest, issuance of checks), sunk expenses (incurred before the start of operations inherent to the activities) and representation expenses (gifts, travel, meals).
Operating expenses are also known as indirect expenses , since they involve those expenses related to the operation of the business but are not investments (such as the purchase of a machine).
Differences with investments
Let us remember that, in the economic sense, an investment is the placement of capital that is made to achieve a future profit. The investment implies the resignation of an immediate benefit for a future one.
Operating expenses, on the other hand, are used to run the business and do not materialize in anticipation of a future profit, but rather their function is to allow the subsistence of commercial activity (which, of course, is intended to be profitable and award winnings).
For example: the purchase of five computers by a company is an investment. However, the day-to-day expenditure on print cartridges, sheets, and electricity is part of the operating expenses.
Operating expenses allow a company to stay in business.
Accounting classification of operating expenses
Another classification of this concept, from the accounting point of view, may refer to the expenses incurred by a certain entity to exist as such, that is, to operate in a certain trade.
Within this definition operating expenses include: for sale (those whose purpose is to increase profits from trade, within this classification would be supplies, commissions, advertising, etc.), the administration (to function is necessary for a number of essential procedures are carried out to establish itself as organization within these expenses payroll employees, fees, etc) and are included in manufacturing (all costs of labor and materials to develop the productive task; these expenses can include the purchase of raw materials, machinery and labor).
Before creating a company, it is essential to carry out a brief analysis of operating expenses to be able to discern whether or not it will be profitable. Once the company is established, this analytical work should be continued in order to know when to decrease production or make any appropriate changes before the company becomes unprofitable .
It usually happens that inexperienced people in the accounting area carry out all the accounts prior to the registration of a premises taking into account the most striking things: machinery, employees, raw material; However, there are many other expenses and possible investments that will have to be made and that will have their monetary cost, so before making such an important decision it is necessary to analyze all the pros and cons of size enterprise.
For example: if the business will be located in a central or tourist area, the advertising costs there will be much higher than if it is located on the outskirts of the same city. It only remains to add that the most advisable thing is to talk to people who are working in the same field to ask them the pertinent questions about the different movements of the market and ask them for advice to make correct decisions regarding this new venture .