Operating expenses are ongoing costs incurred from running a business that are not related to production. Basically, the day-to-day costs to operate. Any cost not related to the direct production of a good or service gets filed under operating expense. Operating expenses included in running a business are rent, utilities, wages, office supplies, and business travel. Operating expenses differ 🍎by industry and within an industry by how a company decides to operate based on its business model.

As a general rule, an increase in any type of business expense lowers profit. Operating expenses are only one type of expense that reduces net sales to reach net profit. An 澳洲幸运5官方开奖结果体彩网:income statement has three levels of profit, however, and the relationship between operating expenses and profit can be seen most directly when looking at 澳洲幸运5官方开奖结果体彩网:operating profit, also known as profit ♚before interest and taxes.

Businesses often look at operating expenses under a microscopic eye, as it is an area that is easier to cut costs, as opposed to costs related to manufacturing or fixed costs. Companies can reduce operating expenses by ouဣtsourcing certain divisions of the business, allowing employees to work from home, reducing starting salaries, or automating parts of the business.

Operating Expenses and Pro𝕴fit on the Income Statement

On an income statement, profit calculated by deducting the 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGS) from total net sales is called 澳洲幸运5官方开奖结果体彩网:gross profit. The COGS includes both fixed costs and variable production costs. Both types of production costs reduce gross profits. However, fixed production costs, such as buildings and equipment, are unaffected by production le🧔vels, whereas variable costs, such as the wages paid to factory workers and the cost of raw materials, increase when production levels rise.

At the second level of profit, operating profit is calculated by subtracting operating expenses from gross profit. Sales, general, and admౠinistrative expensꦫes (SG&A) are also included in operating expenses but sometimes marked separately on an income statement. SG&A are overhead expenses not dir🎃ectly related to production. SG&A typically include the cost of administrative buildings (as opposed to production plants), the salaries of salespeople and executives, and expenditures for office supplies, legal expenses, and marketing co♔sts, for example. Net profit is then calculated by deducting non-operating expenses such as taxes and interest from operating profit.

The Bottom Line

Net profit is equal to revenue minus the cost of goods sold (COGS), operating expenses, and taxes and interest. Cutting back on operating expenses or the COGS can increase net profit, at least in the short term, but a business must be carefu💞l not to cut back so much that the sales are adversely impacted by shoddy production quality or a failure to meet customer demand.

On the other hand, some business expenses, such as purchases of new information technology innovations, can lower 澳洲幸运5官方开奖结果体彩网:net income over the short term but raise income potential over the long term. 澳洲幸运5官方开奖结果体彩网:Capital expenses on equipment and other fixed assets can be depreciated over several years, lowering the immediate impact on profits.