We work with small business owners and entrepreneurs. Some are seasoned, others are just growing their side hustle. Their skills are varied and they have a wide variety of talents. We often get asked to explain the ins and outs of financial reports and have found that providing our favorite clients with a working knowledge of accounting terms is helpful. With that end in mind, we’re sharing that expert knowledge with you. So if you’re looking to get a better grasp on your small business books, want to understand your financial reports so you can make better business decisions, or even are just starting out and want to do it right… you can check out our word of the week and start expanding your working financial knowledge.
What Are Operating Costs?
Operating costs can fluctuate, but knowing what they are and tracking them month to month can do a lot when it comes to running your business. So what are operating costs?
Operating costs are one of two types of business expenses. These costs are are closely related to making products and performing services and can include:
- cost of shipping your products to a distributor or the shipping you pay to receive your raw materials
- cost of your raw materials
- manufacturing supplies (equipment or materials used to produce the product or service)
- labor of employees (or your time if you’re a solopreneur)
How Does Knowing Your Operating Costs Help?
Just knowing your operating costs isn’t enough. As mentioned before, these costs can fluctuate and tracking it over time can help you see trends and plan for the upcoming year. In addition, understanding operating costs can help you determine the price for your product or service. Charging too little could mean that your profit would be small; or worse, that you’re operating with a deficit meaning you’re not making any profit at all. Plus, knowing and tracking your operating costs can help you claim some of them as a deduction come tax time – meaning you’re not only doing good business, but you’re being smart about it.