Money spent

How are operational costs for your Business calculated and what are they?

By Shamitha Ramanan

Operating costs are any expenses that are required for the day-to-day maintenance and administration of your business. Commonly referred to as “overhead,” these essential business costs include electricity, payroll, and office leases. Businesses can cut wasteful expenditure and save costs by routinely reviewing operating expenses.

The cost of products sold is one of the main elements of operational costs (COGS). The direct expenses incurred in manufacturing the products or services offered by your company are known as COGS, Cost of Goods Sold. 

Operating cost ratios

The operational income and operating expense ratio are the two most crucial pieces of information you may gather from operating costs. 

Operating income

The total profit generated by the operations of your business is known as operating income. Operating income is calculated using the following formula:

Operating Income = Total Revenues – Operating Costs

Operating expense ratio

On the other side, the operating expense ratio does suggest financial soundness. No matter how big or small your firm is, it is simpler to compare yourself to others in your field when efficiency is expressed as a percentage. 

By directly comparing your expenses to your income, operating expense ratios (OER) allow you to monitor your efficiency. OER’s equation is as follows:

Operating Expense Ratio = Operating Costs ÷ Total Revenues

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