The term "operating expenses" is most commonly used in corporate finance. They, as a rule, designate those costs that arise periodically when doing business.
Operating expenses are the costs associated with the management of the organization, as well as its activities for the sale of manufactured (supplied) products. Simply put, it is the cost of running a business.
Types of operating expenses
The most common item of such expenses is the payroll, which sometimes has the largest volume in the total expenses of the organization. Other items that can also be included in the list of operating expenses are advertising and marketing expenses, expenses for stationery, utilities, expenses for purchasing raw materials, fees for licenses and legal fees, expenses for research activities.
Depreciation, reflecting the decline in the value of non-current assets over a certain period of time, should also be attributed to operating expenses. In the event, for example, if vehicles or production equipment wear out over time and their residual value is lower than the original value, then the difference is written off to expenses as depreciation. This item is considered to be an operating expense if the assets are used by the entity in operating activities.
Difference between operating expenses and capital
It is also important to note that one-off costs associated with running a business tend to be capital expenditures. For example, it might be buying new equipment when the old equipment is already fully depreciated.
Capital and operating expenses are separated mainly due to the fact that the management of the company and potential investors in this way can get more detailed information about where the money will be spent before the profit is made.
Obtaining and using information about the dynamics of operating expenses
All publicly traded firms and non-profit organizations are required to include operating expenses in their annual reports. This information is usually accompanied by financial charts comparing the operating expenses of the current calendar year with the operating expenses of the previous year. This gives a clear picture of the dynamic change in costs over a long period of time.
Management accounting and the use of specialized software for financial calculations are the most common ways to obtain the necessary information about the dynamics of operating expenses.
The financial position of any firm in the face of market uncertainty never remains stable. And therefore, if the amount of operating expenses from year to year will change significantly, especially upward, the management of the organization should be ready to explain to investors and creditors about the reasons for such an exciting phenomenon for them. Having detailed information will help to avoid unwanted actions on their part, as well as to determine the causes of these trends, which is necessary in solving the problems of growing costs.
