Operating Expenses – A great measure to determine Profitability & Liquidity position of the business

Accounting is a pervasive subject and this is a known fact to all. By pervasive I mean to say Accounting is undertaken by every type of business organisation regardless of large or small entities. Hence it is very essential to know and understand what type of costs impact a business and how do they impact the profit or loss of the business.

A business concern incurs two types of costs namely operating andNon-operating costs. Operating expenses are those expenditures that a business incurs to engage in any activities not directly associated with the production of goods or services whereas Non – operating expenses are the expenses incurred by a business which are outside of its main or central operations.

In this article let us analyse Operating expenses in detail.

Operating expenses also termed as Operational costs are the expenses which are related to the operation of a business. They are the cost of resources used by an organization just to maintain its existence.These expenditures are the same as selling, general and administrative expenses.

An income statement records all the incomes and expenses of the business during the accounting period and by doing so the profitability of the business is ascertained. Income statement records different types of expenses like cost of goods sold, Selling General& Administrative costs, Depreciation and Amortization, Other operating expenses, Interest expenses and taxes. However, Interest and taxes are excluded at the time of ascertaining the operating income of the company.

Operating expense is a key element considered for the calculation for operating income. Operating income is one of the critical factors based on which various financial decisions are taken by the management. The lower a company’s operating expenses are, the more profitable the company is.

Several factors like pricing strategy, prices for raw materials, or labor costs can affect operating expenses but because these items are directly related to the day to day operations of the business, operating expenses can be considered to be a good measure to determine flexibility and liquidity position of the company.

It is advisable to keep the operating expenses low if the company wants to be more profitable among its competitors.

About the author

FAME is a leading Accountancy training provider. FAME brings together under one roof a wide range of accounting courses blended with real world experience and practical application. FAME aims to bridge the gap between theoretical knowledge and practical challenges that accountants face in their day to day working. We provide practical workplace skills for finance staff meeting the needs of employers, bankers, government and learners, both now and in the future. Our students are integral to the success of an organisation and at the heart of ensuring the smooth running of an accounting department.