Both costs are accounted for differently in a company's books, allowing analysts to determine how costs are associated with revenue-generating activities and whether or not the business can be run more efficiently. Because profits are determined both by the revenue that the company earns and the amount the company spends in order to operate, profit can be increased both by increasing revenue and by decreasing operating expenses. Because cutting costs generally seems like an easier and more accessible way of increasing profits, managers will often be quick to choose this method. For example, if a company cuts its advertising costs its short-term profits will likely improve, as it is spending less money on operating costs.
The following strategies are among those available for reducing and controlling costs. Budget, Plan and Monitor A budget provides a roadmap for the financial management of the organization including controlling costs.
Historical results along with the effects of current revenue and cost trends provide the basis for a budget and can help predict the future financial health of the organization.
It will also provide the benchmark for reporting future financial results. Monthly reviews of actual financial results compared to budgeted amounts will provide the information necessary to react quickly to variances to the plan.
Review Purchasing Procedures Purchasing procedures should be examined for possible areas Operating costs reducing costs. During the review, a check of authorization processes should take place to ensure adherence to authorization limits.
The review should also look for adequate controls on spending limits and the number of people authorized to make purchases. Review Suppliers An analysis of the existing base of suppliers could also reveal opportunities for reducing costs by consolidating purchases for additional buying power.
Consolidation of suppliers will also produce a reduction of administrative expenses due to processing fewer purchase orders, invoices and payments.
Additionally, try negotiating with current suppliers for better pricing and consider proposals from alternative suppliers to lower costs in all operating expenses areas including the small expenses. Ask Employees to Analyze Expenses Assigning a team of employees to analyze an expense category can identify areas of expense reduction.
Employees can often identify items with less expensive alternatives that will meet the needs of the organization. Sometimes, items are identified that can be eliminated entirely without affecting the organization.
Rewards for participation in the effort to reduce expenses can include financial and other incentives but recognition of their achievement should also be motivational. The consultant could also perform an operational audit of purchasing processes, negotiate with suppliers, and implement cost savings recommendations.
There are consultants available who will perform this service on a contingency basis.
These organizations offer consultative and training services and special pricing programs in specific areas. Their websites also provide information related to reducing costs including budgeting, purchasing, choosing a consultant and overall financial management.
Although reducing operating costs can be a daunting and time-consuming task, reductions can be accomplished using these strategies and utilizing the many resources available to nonprofits.
Her professional services firm specializes in reducing operating expenses for nonprofit organizations and is affiliated with a national organization of cost reduction specialists.
She has over 20 years of executive financial management experience in both privately and publicly held companies.Although different businesses have different costs associated with them, the main operating expenses of most businesses include: Rent.
Under many lease agreements, you'll be expected to provide.
An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing. Calculating your break-even volume helps you set sales targets needed for profitability, and total operating costs are part of the equation.
May 01, · Source: FASB Accounting Standards Update (see Appendix) When operating lease costs are reported as a lump-sum item, as shown in . Businesses have to keep track of both operating costs and costs associated with non-operating activities, such as interest expenses on a loan.
Both costs are accounted for differently in a company. What is an 'Operating Cost' Operating costs are expenses associated with the maintenance and administration of a business on a day-to-day basis.
The operating cost is a component of operating.