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If you run a retail business, you already know that it costs money just to keep everything up and running. These costs are known as operating expenses (sometimes shortened to “OpEx”). Understanding your operating expenses is the first step toward a healthier bottom line and will help you make savvy decisions for your business in the future. Below, we’ll explain what qualifies as an operating expense and explore some strategic cost-saving measures.
What are operating expenses?
Operating expenses are your business’s ongoing, day-to-day costs—they’re the essential, unavoidable payments to keep everything functioning smoothly. Operating expenses can be reported on your income statement, and they have a significant impact on the net income of your business. You need to tally up your operating expenses to calculate your operating income—that’s your gross income minus your operating expenses.
Here are some of the most common operating expenses:
- Rent or lease payments for your retail space
- Utility bills like electricity, water, or internet
- Payroll and employee-related costs like salaries, benefits, or training
- Repairs and upkeep for your store and equipment
- Marketing and advertising expenses like billboards or paid search ads
- Professional fees paid to a lawyer or an accountant
- Office supplies like printer paper or ink
- Insurance premiums
Let’s use a hypothetical pet store as an example to see how these expenses stack up. Our imaginary Paws & Purrs Pet Palace pays $5,000 a month for a 2,000-square-foot space; $1,000 for utilities; around $15,000 for sales associates, groomers, and obedience trainers; and $1,500 for professional fees to an onsite veterinarian. That totals up to operating expenses of at least $22,000 a month. Typically, a business’s largest operating expenses are rent, utilities, and payroll.
What are not considered operating expenses?
There are some costs you’ll incur that don’t count as operating expenses and are reported separately on an income statement or balance sheet. A few examples:
- Cost of goods sold: The cost of producing or acquiring the products a brand sells
- Interest expenses: Costs related to borrowing money, like loan interest payments
- Taxes: Federal, state, and local taxes owed by the business
How do you manage operating expenses?
You can’t manage what you don’t measure: Monitoring and tracking your operating expenses can make all the difference when it comes to profitability and cash flow. Plus, getting to know your expenses can reveal opportunities for cost savings or better budgeting.
Here are a few strategies to try out:
Create and maintain a budget
The first and one of the most important steps for any business is to make a budget and stick to it. After you’ve made a well-thought-out budget, you can compare it with your actual expenses, which can then reveal any areas where you could cut costs. Begin by categorizing all of your business’s operating expenses, from rent to payroll to office supplies, and then estimate the expected monthly cost based on your previous numbers. You can then establish spending thresholds to control costs and protect your bottom line.
Use accounting software or apps
To save on time and frustration, it’s a good move to invest in accounting software to track and analyze your operating expenses. Accounting software automatically records all of your operating expenses, and with just a few clicks, you can generate expense reports, budgets, and financial statements. Not only is accounting software more efficient than doing things manually, but it also minimizes the risk of errors and inaccuracies. When it comes to user-friendly options for a small business, popular ones are FreshBooks, HoneyBook, Wave, and Xero.
Keep a close eye on your inventory
Maintaining the right level of inventory for your store is essential to getting your operating expenses in check. For small businesses, inventory can be a significant expense, and if you buy more than you need (aka overstocking), you can tie up too much of your capital in one area. Businesses can avoid overstocking by ordering products only when they need them instead of stockpiling. They can also monitor inventory turnover ratio, or how quickly a business sells and replaces items.
Optimize your supply chain
Take a close look at your supply chain. How do your goods make it to you? Who is getting your goods to you? Take a closer look at the contracts for your suppliers, wholesalers, and logistics providers to make sure you’re paying the most competitive rate. See if you can take advantage of volume discounts or consolidate shipments.
Reduce energy expenses
Whether you’re an individual or a business, utilities can be a runaway expense. If you have a physical storefront, reducing your energy costs can be a simple way to cut down on operating expenses. Keep an eye on your utility bills and do occasional energy audits to track your usage. Get rid of inefficient lights and replace them with LED fixtures instead. Update HVAC and refrigeration units with newer, energy-saving models.
Don’t forget about labor costs
Be thoughtful when it comes to staffing. Salaries, wages, and benefits can be a big line item on a retail store’s operating expenses. Understand your store’s needs so that you can get strategic when it comes to head count. If your business is one with fluctuating demand, consider seasonal workers or part-time workers.
As a retail business owner, managing your operating expenses is an important part of your store’s profitability. It’s more than just crunching numbers, it’s about taking control of your business’s financial health. With careful planning and consistent review, you’ll be able to find areas for improvement and make better decisions about how you spend your money.
Are you opening a new retail store? Read more about Open with Faire and learn how to apply for up to $20,000 to use toward buying products on Faire.
