Calculating Your Business Operating Expenses

Gaining a good understanding the business operating expenses of your new venture is not only critical to the success of your startup but also one of the central tasks when you are planning your business and developing your business plan.

You will need to know what your operating costs are likely to be so that you can calculate

• Working out how you are going to price your products or services
• Calculating your breakeven point
• Establishing the profit potential of your business idea
• Working out how much funding you need for the first three to six months of operation
• Preparing your Proforma Income Statements and
• Developing your Cash Flow forecasts

Identifying your Business Operating Expenses

Your operating expensess will be reported in your Income Statement and will consist of the cost of sales, selling expenses and administrative expenses.

Examples of operating expenses include:

This list is in no way comprehensive, as the number and type of operational costs will vary from one business to the next depending on the type and size of the business. It is presented here as a guide and a memory jogger for you as you begin to identify the operating costs for your business.

As you work your way through all of your expenses and estimating the amount you are likely to spend on each of them, make a note of the frequency - how often will you be buying inventory, or stamps or paying the freight company? Will you be paying for your business insurance one a year or on a monthly basis?

You are going to need this additional information for your detailed Income Statements and for your Cash Flow Statements.

Classifying your Costs

Once you have identified all of your operating costs the next step is to classify the costs as variable costs or fixed costs.

The reason for doing this is in the nature of the costs. Variable costs are just that - they vary with changes in proportion with any changes in sales. Examples of variable costs would be raw materials or sales commissions. These costs are not incurred unless the product is manufactured or sold.

Fixed costs are fixed, in other words, they will remain the same regardless of how many widgets you sell. Examples of fixed costs would be rent, equipment leases or salaries for your office staff.

You are going to need this information to calculate your breakeven point.

What's Next?

Now that you have identified and classified your costs, you can move on to setting your prices, and assuming that the numbers in your break even analysis are reasonable, you can also start developing an operating budget for your new business.