Effect Of Financial Factors On Your Business
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Operating expense is simply an expense that a business organisation incurs through its normal business operations. Operating expense is often abbreviated as OPEX. Such expenses include rent, inventory costs, equipment, payroll, marketing, insurance and the funds allocated towards research and development. One of the most fundamental responsibilities that a management should be satisfied with is determining how lower they can pull the operating expenses, without affecting the stability of the firm and its ability to compete with its contemporaries. Generally, if a business is not in a position to raise the prices of existing products, find new market for the products or change the product channels to increase profits, it tends to increase their bottom line by cutting down the operational expenses. These are the expenses which can be controlled and cut down without affecting the quality of the product or service provided to a great extent. Laying off the current employees and reducing the quality of the products can definitely boost the earnings initially and they may even become necessary actions to take. However, there are certain operating expenses which can be considerably reduced to get the same financial result.
There is a general rule that an increase in any kind of business expenditure would lower the profit. However, an income statement of a business has three levels of profit, and the relationship between operating expenses and profits can most directly be seen while looking at the operating profit. This is the profit before calculating income and taxes. On a normal income statement, profit is calculated by subtracting the cost of goods sold (COGS) from the total net sales made in the financial year. This is what is commonly known as the gross profit. The COGS includes both the fixed and the variable business costs. However, fixed costs such as the costs of buildings, equipments and other fixed assets are not affected by a change in production levels. On the other hand, variable costs (such as the wages paid to workers, cost of raw materials and salary paid to the employees) tend to increase with an increase in the production level. When you come to the second level of profitability, the operating profit is generally calculated by deducting the operating expenses from the total gross profit. However, always keep in mind that the various sales, general and administrative expenses (also called SG&A) are the overheads which are never really related to production. SG&A are those operating expenses which include the cost of administrative buildings, the salaries of salespeople and executives as well as the expenditures regarding office supplies. All these expenses may not aid the production, but significantly affect the profits your business makes during the financial year.
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