Tracking operating expenses accurately is critical for businesses, but can be a major challenge.
Luckily, QuickBooks provides powerful tools to calculate, analyze, and manage operating costs with ease.
In this post, you'll learn the formula for tallying total operating expenses, how to set up tracking in QuickBooks, best practices for monitoring and controlling costs, and how to leverage advanced reporting to unlock operational insights.
Introduction to Calculating Operating Expenses in QuickBooks
Operating expenses are the day-to-day costs involved in running a business. Monitoring these expenses is critical for financial planning and analysis. QuickBooks provides small businesses with tools to easily track operating costs over time.
Understanding What is Operating Cost
Operating costs, also called operating expenses, are the regular expenses a business incurs from its normal operations. Unlike capital expenditures, operating expenses are written off each year.
Common examples include:
- Employee salaries and benefits
- Rent
- Utilities
- Office supplies and equipment
- Insurance
- Accounting and legal fees
Tracking operating costs allows businesses to budget effectively and analyze spending patterns over time. It gives insight into where money is being spent and whether adjustments need to be made.
The Role of QuickBooks in Tracking Operating Costs
QuickBooks helps small businesses track all operating expenses in one place over time. Key features for managing operating costs include:
- Customizable expense tracking according to the company's general ledger
- Reporting tools to monitor spending by expense category or time period
- Budgeting features to set expense targets and alert when close to or over budget
- Ability to attach receipts and documentation to expense transactions
- Visual charts and graphs providing at-a-glance views of expense trends
Using QuickBooks to control operating costs enables better financial oversight and decision making based on accurate, timely data. Companies can benchmark expenses annually and determine where cuts may be made if necessary.
What is the formula for calculating operating expenses?
Operating expenses are the day-to-day costs incurred from running a business. To calculate operating expenses, you can use the following formula:
Operating Expenses = Cost of Goods Sold + Selling, General & Administrative Expenses
Where:
-
Cost of Goods Sold (COGS) includes the direct costs attributable to the production of goods sold by a company. This includes material costs, labor costs, and overhead costs required to acquire and convert the raw materials into finished goods.
-
Selling, General & Administrative Expenses (SG&A) covers the operating costs not directly tied to production such as marketing, advertising, rent, utilities, office supplies, legal fees, insurance, etc. Essentially, SG&A represents all operating expenses except for costs directly related to making the products or services.
For example, if a company has:
- Total revenue of $1,000,000
- COGS of $500,000
- Operating income of $100,000
We can calculate the operating expenses as:
Operating Expenses = Total Revenue - Operating Income - COGS
Operating Expenses = $1,000,000 - $100,000 - $500,000 = $400,000
So based on the information provided, this company's total operating expenses is $400,000.
Tracking operating expenses regularly is crucial for businesses to monitor overhead costs and make decisions aimed at optimizing operations and minimizing expenses where possible. QuickBooks makes the process seamless by automatically calculating operating expenses based on the data input for revenue, COGS, and operating income.
How is total operating cost calculated?
From a company's income statement, you can calculate the total operating cost by adding together two main components:
-
Cost of Goods Sold (COGS): Also called cost of sales, this includes the direct costs attributable to the production of goods sold by a company. It includes material costs, labor costs, and overhead costs required to acquire and convert the raw materials into finished goods.
-
Operating Expenses: These include all other expenses not directly tied to production, such as:
Marketing expenses
Includes advertising, promotions, market research, etc.
General and administrative expenses
Includes salaries, utilities, insurance, rent, office supplies, etc.
Depreciation and amortization
Allocates the cost of fixed assets over their useful lives.
To calculate total operating cost:
- Obtain the COGS from the income statement
- Add together all operating expenses
- The sum of COGS and operating expenses equals the total operating cost
Keeping operating costs low as a percentage of revenue is key for improving profit margins. Benchmarking against industry averages allows assessment of whether the operating cost structure is efficient.
Breaking operating costs down into sub-categories also enables identifying the largest drivers, making it easier to set targets for reducing specific costs.
How do you account for operating expenses?
Operating expenses are costs incurred from normal business operations. To accurately track operating expenses in QuickBooks:
Review Expense Accounts
- Navigate to the Chart of Accounts and review expense accounts grouped under Operating Expenses. Common accounts include:
- Rent
- Utilities
- Office supplies
- Equipment leases
- Insurance
- Professional fees
Record Transactions
- Record all operating expense transactions in the appropriate account over time. For example:
- Record rental payments to Rent Expense
- Record utility bills to Utilities Expense
Generate Reports
- Run QuickBooks reports like the Profit & Loss to analyze operating expenses for a period.
- The total expenses under Operating Expenses gives the total operating costs.
Monitoring operating expenses this way provides visibility into overhead costs and helps make informed business decisions.
What is the formula for operating expense ratio example?
For example, a company has bought a property to rent out to other smaller companies. To find out how the property is doing, the company would look at the operating expense ratio (OER).
The OER formula is:
Operating Expense Ratio = Operating Expenses / Net Sales x 100
Where:
- Operating Expenses are the day-to-day expenses needed to run the property, like utilities, maintenance, management fees, taxes, and insurance
- Net Sales is the amount of rental income generated by the property
So if the property generates $100,000 in annual rental income and has $30,000 in annual operating expenses, the OER would be:
OER = $30,000 Operating Expenses / $100,000 Net Sales x 100 = 30%
If the OER is higher, it means a greater proportion of the rental income is being spent on operating expenses, leaving less net operating income. So the company would consider options to lower operating costs to increase profitability of the property.
Tracking OER over time for a rental property can help assess its financial performance. A lower OER percentage is generally more favorable.
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Comprehensive Operating Expenses List in QuickBooks
This section will provide an overview of common operating expenses that businesses incur, and how to categorize them within QuickBooks for accurate tracking and reporting.
Operating Costs Examples: Common Expenses to Monitor
Here are some typical operating expenses that most businesses need to monitor closely:
- Rent and utilities like electricity, gas, water, etc. These are usually fixed costs that recur.
- Payroll expenses including salaries, benefits, payroll taxes. These depend on the number of employees.
- Equipment costs for purchase, lease, maintenance and repairs. These vary based on usage and age of assets.
- Shipping and delivery fees. These tend to fluctuate with sales volume.
- Marketing and advertising expenses. Budgets for these may change based on campaigns.
- Technology costs including software subscriptions and internet expenses. These are usually fixed monthly costs.
- Travel, meals and entertainment costs. These vary depending on business activities.
- Professional fees like accounting, legal and consulting. These depend on specific projects and needs.
Properly categorizing these operating expenses in QuickBooks ensures accurate financial statements and facilitates good cost control.
Fixed vs. Variable Operating Expenses
Fixed operating expenses remain constant irrespective of production or sales volume. For example:
- Rent
- Insurance
- Equipment lease payments
Variable operating expenses change in proportion to production and sales. For example:
- Direct material costs
- Commissions
- Shipping fees
Distinguishing between the two is important for cash flow projections and cost management. Fixed costs are easier to plan and budget for. Variable costs can be influenced by production volumes.
Direct vs. Indirect Operating Expenses
Direct operating expenses can be traced to specific cost centers, departments or products. For example:
- Material costs for a specific product
- Commission paid to a salesperson
Indirect operating expenses are difficult to allocate to cost centers/departments. For example:
- Utilities
- Administrative salaries
Understanding this difference helps in accurate cost allocation and avoiding distortions in cost reporting.
Accurately recording operating expenses by type and behavior in QuickBooks provides major financial insights for decision making.
Setting Up and Calculating Total Operating Cost in QuickBooks
This section will guide users through the process of setting up their accounts to accurately reflect total operating costs and how to calculate these using QuickBooks.
Create Operating Expense Accounts
To effectively track operating expenses in QuickBooks, the first step is to set up individual accounts for each type of expense. This allows you to categorize transactions correctly and generate detailed reports later. Some common operating expense accounts to create include:
- Rent/Mortgage
- Utilities
- Insurance
- Repairs & Maintenance
- Office Supplies
- Professional Fees
- Travel
- Marketing & Advertising
- Depreciation
Go to the Chart of Accounts in QuickBooks and add these as new accounts under the Expense section. Make sure to properly categorize them for accurate financial statements.
Recording Total Operating Cost Transactions
Once expense accounts are set up, transactions should be recorded to the correct account based on the type of operating cost. Expenses like rent, utilities, supplies, fees, etc. can be entered as individual transactions linked to the appropriate account.
Depreciation expenses for fixed assets can be automated in QuickBooks to allocate a portion of the asset's cost as an expense each month. This avoids having to manually calculate and enter depreciation.
Review all operating expenses monthly to ensure they are properly categorized across the various accounts. The total of all these accounts will provide the total operating cost amount.
Using the Operating Cost Percentage Formula in Reports
A useful metric is to analyze operating costs as a percentage of total revenue, especially over time. Lower percentages indicate greater profitability and efficiency.
The operating cost percentage can be calculated in QuickBooks reports as follows:
Total Operating Expenses / Total Revenue x 100
For example, if total operating costs were $100,000 and total revenue was $500,000 for the year, the operating cost percentage would be:
$100,000 / $500,000 x 100 = 20%
Compare this metric year-over-year and optimize costs to reach a lower percentage over time. The Profit & Loss report provides the necessary figures to easily determine this percentage.
Using QuickBooks effectively to track operating costs takes some initial setup, but enables much more accurate cost control and reporting capabilities for smart business decisions.
Analyzing Operating Cost Importance and Management in QuickBooks
The Significance of Operating Cost in Business Strategy
Operating costs are the expenses associated with running a business on a day-to-day basis. They are a key component of any financial analysis or business strategy, as they directly impact profitability. Some examples of common operating costs include rent, utilities, payroll, insurance, supplies, etc.
Understanding and properly budgeting for operating costs is critical, as unexpected increases can quickly eat into profits. Likewise, finding ways to reduce operating expenses can greatly improve a company's bottom line. As such, closely monitoring and managing operating costs should be an integral part of any business's financial planning and analysis.
Best Practices for Managing Operating Expenses
Here are some tips for effectively managing operating expenses in QuickBooks:
- Set up separate accounts for each major expense category (rent, utilities, payroll, etc.) to enable tracking by type.
- Create budgets for operating costs based on historical data and forecasts. Set budget alerts.
- Review operating expenses regularly - monthly is best practice. Investigate any discrepancies or overages.
- Look for ways to streamline processes and reduce recurring expenses. Renegotiate contracts with vendors/suppliers when possible.
- Use QuickBooks reports like Profit & Loss, Expenses by Vendor Summary, and Budget vs. Actual to analyze spending.
Set Budgets and Track Against Them
Setting budgets for operating expenses is critical for cost control. Within QuickBooks:
- Use historical averages and sales forecasts to budget future expenses. Account for expected inflation or growth.
- Set up budget alerts to notify you when close to exceeding or actually exceeding the budgeted amounts in any period.
- Run regular Budget vs. Actual reports in QuickBooks to compare budgeted operating expenses to actual spending. Analyze any discrepancies and adjust budgets or spending accordingly.
Perform Monthly Reconciliations
Reconciling operating expenses regularly is vital to ensure transaction accuracy in QuickBooks:
- Review bank and credit card statements monthly to confirm all expenses charged or paid are properly recorded in QuickBooks.
- Investigate and correct any discrepancies through adjusting journal entries.
- Implement approval workflows for purchases to enhance oversight.
- Perform periodic audits by sampling transactions to check for errors or misstatements.
Staying on top of operating costs is critical for small business success and profitability. Following these QuickBooks best practices can help business owners control expenses, meet budgets, and gain financial visibility.
Advanced Reporting on Operating Expenses in QuickBooks
This section covers the reporting features in QuickBooks that allow for in-depth analysis of operating expenses and how to leverage these for business insights.
The Profit & Loss Report: Operating Costs Detailed View
The Profit & Loss report in QuickBooks provides a detailed breakdown of operating expenses, making it easy to analyze where money is being spent in your business.
To generate this report:
- Go to the Reports menu and select Profit & Loss
- Customize the date range to view expenses for a specific time period
- In the report filter, select "All Income and Expense Accounts" to show the full chart of accounts
The report categorizes operating expenses into line items like:
- Rent
- Utilities
- Office supplies
- Equipment rental
- Vehicle expenses
- Travel
- Meals and entertainment
- Telephone and internet
- Advertising
- Accounting fees
Reviewing the total amounts and trends over time for each line item helps identify top operating costs to focus on optimizing. Comparing budgets to actuals also indicates areas of overspending to control.
Historical Trend Reporting for Operating Costs
Analyzing operating expenses over longer time periods is key for financial planning. QuickBooks enables tracking costs historically with its "This Year vs Last Year" comparison report.
To generate:
- Go to Reports > Company & Financial
- Select "Profit & Loss Previous Year Comparison"
This report shows operating expenses for the past two years side-by-side, calculating the net change and percentage difference per account.
Monitoring increases and decreases year-over-year helps make informed budget decisions and ensure operating costs remain aligned with operational targets as the business scales over time. Any unusual fluctuations can also be quickly identified for further analysis on what drove the change.
Conclusion: Mastering Operating Cost Tracking in QuickBooks
In summary, closely monitoring operating expenses in QuickBooks provides heightened financial visibility to influence decision making and safeguard profit margins. This final section will reiterate key points and recommended next steps.
Key Takeaways on QuickBooks Operating Expenses
- Carefully tracking operating expenses allows businesses to identify spending patterns and make informed decisions to optimize profits. This includes expenses like wages, supplies, utilities, etc.
- The Operating Expenses report in QuickBooks breaks down totals by account and time period for detailed analysis.
- Budgeting for operating expenses based on historical averages and growth plans sets a guideline for spending.
- Regularly comparing actual operating costs vs the budget quickly highlights any problem areas that need attention.
- Dividing operating expenses by revenue shows the operating cost percentage, a key profitability metric to monitor.
Next Steps for Effective Operating Cost Management
Businesses can take the following steps to implement better operating cost tracking practices:
- Classify all transactions to the appropriate operating expense accounts.
- Generate and review operating expense reports monthly.
- Set budgets annually and reforecast quarterly based on updated projections.
- Calculate operating cost percentage monthly and investigate any spikes.
- Discuss expense trends with managers and agree on cost optimization targets.
Closely monitoring operating expenses this way provides the visibility needed to control costs, meet targets, and ultimately boost profit margins.
