Small Business Operating Costs

What Will Your Small Business Operating Costs Be?

Understanding your small business operating costs are critical to the success of your startup.

For one thing, before you can work out whether your new business has enough profit potential to be financially viable, you need to determine what your operating costs will be.

A Definition

Your operating costs or operating expenses is the normal on going expenditure incurred in the course of business.

Identifying your Operating Costs

Your operating costs 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:

Administrative Expenses Production Costs

Accountant Fees Freight In

Advertising Inventory Purchases

Depreciation Production Labour

Equipment Leases Raw Materials

Insurance

Membership Fees or Subscriptions

Office Supplies Selling Expenses

Postage Distribution Costs

Rent Freight Out

Salaries and Wages Packaging Materials

Telephone Sales Commissions

Training and Development Costs Sales Discounts

Utilities

Vehicle Expenses

This list is not in any 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.

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.

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.

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