Analyze Your Operating Expenses

 

Too many business owners focus on increasing their sales without paying enough attention to their expenses.

The truth is, you can’t increase your profits without controlling both your sales and expenses. If you ignore the importance of minimizing your expenses, you will soon find yourself tired and weary of maximizing your sales effort without improving your profit margin.

What costs are we talking about?

Your costs are generally classified into two: fixed and variable. Your fixed costs are your expenses for land, building, machinery, equipment, utilities, etc. These costs do not depend on your production level—you will spend them whether or not you produce something.

Your variable costs, on the other hand, refer to your production inputs—they are your raw materials, labor, supplies, etc. They increase as your production level increases. Your variable costs are also called “operating expenses” because your operation depends on them.

So how’s their definition relevant?

These costs can be distinguished based on your ability to control them. Because your fixed costs are “fixed”, you can’t change them unless you acquire a new asset or capital. They are investments that you can use for an extended period.

What you can control are your operating expenses. By effectively managing the amount of input that you use to create a product, you can make your production or manufacturing process more efficient and bring down your costs.

Analyzing your operating costs is easy. Just follow these three simple steps.

  1. Make an inventory. Make sure to document your inputs and their associated expenses for a given production cycle. Write down the number of products that you produce within the same period. With all these numbers, you should be able to determine the average costs of materials that you use to create a single product.
  2. Record and review regularly. Monitor your production inputs and outputs periodically—weekly, monthly, quarterly, and annually.
  3. Compare your expenses over different periods. Can you identify any trends? If you produce on a large-case basis, will your average expenses go down?

With these simple steps, you can better manage your operating expenses and dramatically increase your profits!

What’s the biggest item on your operating expenses?

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