How To Calculate Operating Expenses: A Guide For Businesses

Marketing 13 minute read 27th September 2023

Using a formula, you can easily calculate operating expenses for your business. A reliable account can effortlessly extract the weekly and monthly costs from your business’s financial sheets. The accountant can input the details using an operating expense calculator to retrieve the total cost. If you’re a DIY guy and want to handle your business operations, you should learn how to calculate operating expenses. You need to know the different types of operating expenses and what expenditures you must count towards your total calculation. This article will provide the necessary information, so there is no need to fret over the starting point.

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How To Calculate Operating Expenses

Before you begin, you need to have basic bookkeeping knowledge. It is vital to be familiar with the accounting terminologies to make heads or tails of the financial statements. It will be challenging to identify the correct expenses without essential accounting know-how. This jargon is not complicated; with a quick search, you can discover what these special words or expressions stand for.

Here are the steps you should familiarize yourself with whenever you calculate a business operating expense:

Gathering Financial Documents

If you are unsure where to begin, gather all of your company’s financial statements. These statements include:

  1. Income statement, also known as profit and loss statement
  2. Balance sheet
  3. Cash flow statement
  4. Equity Statement
  5. Nonprofit financial statement
  6. Any notes or receipts for expenses that may not be included in the financial statements
  7. Bank statements
  8. Credit card statements

It is not necessary, but it is better to grab all the documentation that lists any business expenses. Some of these statements may prove irrelevant if they are not expense-related. A few of them may already be available in the income statement or balance sheet. But if you believe that there is a bookkeeping error accounted for, it is important to review all the statements.

Identifying and Organizing Operating Expenses

Once you have all the statements, go through them with a fine-tooth comb to ensure you don’t miss any transactions. If you don’t note down every dollar spent, you may fail to identify it. This will result in an incorrect calculation of business operating expenses.

If you have a lot of financial documents to review, create a spreadsheet or use accounting software. It will help you to organize and track all the expenses accurately. Start with the profit and loss statement because this includes an individual entry for each business expenditure. Once done with that and any other relevant statement, go through the extra documentation and invoices to cross-reference the expenses. Discard any payments already in the income statement so you don’t double-count expenses.

To make it easier on yourself, you can categorize your business costs into three types:

  1. Office expenses - Rent - Utility costs - Office furniture and supplies - Property taxes - Legal fees - Administrative expenses - Maintenance expenses

  2. Payroll expenses - Salaries - Pensions - Employee benefits

  3. Sales and marketing costs - Advertising and marketing expenses - Sales materials - Marketing automation software - Design expenses - Sales commission

These are some of the operating costs that you can categorize for your income statement. You may have more or less or even include extra categories depending on the nature of your business. Making a list will segregate operating expenses from other types of business payments.

Calculate the Total Operating Costs

Add up all of the costs for each category after identifying and organizing them. Once completed, the next step is calculating the total business costs for a specific period. The formula is straightforward. You sum up all the operating costs you calculated for each category. This will give you a clear understanding of how much your business spends on its operations. For example:

Operating expenses = office expenses + payroll expenses + sales and marketing costs

The calculation is not the tricky part. The main work involves identifying, categorizing, and analyzing the results. However, if your books are accurate, you can track expenses without jumping between different financial statements and payment receipts.

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Calculating Operating Expenses Using Alternate Methods

Adding the sum of all operational expenses is an easy way to determine the total costs of the business. However, there is more than one way to calculate this, and the alternative methods may require additional mathematical equations.

Why do you need alternate methods for calculating operating expenses? There are several reasons why businesses may choose to use alternate methods.

  1. One reason is that different methods may provide a more accurate representation of the actual costs incurred by the business.
  2. The second reason is that using alternate methods can help identify areas where you can minimize or optimize costs. This will lead to improved financial performance.
  3. Moreover, you end up calculating extra financial information such as the cost of sales, the total revenue, etc.

This will help businesses with pricing, budgeting, expense control, and decision-making.

How To Calculate Total Operating Expenses Using Total Revenue

Another way of calculating this is by separating the operating income and costs of goods sold from the total revenue.

Total Revenue

Total revenue is the total amount of money generated from sales or other sources of income. You can calculate total revenue by multiplying the number of sales by the sale price of each item. For example:

Total revenue = number of sales x sale price

Costs of Goods Sold (COGs)

The direct costs incurred in producing or acquiring the goods it sells are the cost of goods sold. The COGs formula includes the cost of raw materials, labor, and any other costs associated with the production of goods.

Operating Income

Operating income is the income generated from the core operations of the business, excluding any non-operating expenses or income. By subtracting the cost of goods sold from the total revenue, you can determine the operating income. For example

Operating Income = total revenue - cost of goods sold

Operating Expenses

Once you have calculated all three pieces of financial information, you can now calculate the expenditures. If you are wondering how to do it, this is the other formula you can use:

Operating expenses = total revenue - operating income - cost of goods sold

How To Calculate the Operating Expense Ratio

Sometimes, you may require the total operating expenses in the form of a percentage. For this, you need to learn how to calculate the operating expense ratio. The operating expense ratio is also known as OER, and the formula is easy to grasp. The mathematical equation is the basic percentage calculation that you were taught in school. That equation involves dividing the expense by the total revenue and then multiplying it by 100%. For example:

Operating expense ratio = (total expense / total revenue) * 100

How To Calculate Base Year Operating Expenses

Base year operating expenses are not another alternative calculation method. Instead, the term “base year” refers to a reference year. What this means is that businesses choose a year as a reference point for financial analyses when comparing future expenses. Companies opt to calculate their base year because they can track and evaluate changes in their operating expenses over time. They can identify trends, assess the impact of cost-saving measures, and make decisions regarding budgeting and resource allocation. Understanding how to calculate base year operating expenses is simple. You need two things:

  • The total operating expenses
  • A base year to serve as a benchmark for comparison

The formula is as follows:

Base year operating expenses = (total operating expenses of the current year / total operating expenses of the base year) * 100

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Marketing in Operating Expenses

If you are trying to reduce your operating costs, don’t cut back on marketing. It plays a crucial role in the overall financial performance of a company. By accurately implementing marketing strategies, businesses can grow.

Since this is an important factor, it is best to hire a professional marketing team such as Beambox. They specialize in guest WiFi, which is a valuable tool for collecting customer data and driving location-based marketing campaigns. With their expertise, Beambox knows how to calculate operating expenses to maximize ROI. Learn more and grow your business today with Beambox.

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