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Calculating Your Operating Costs

Understanding the operating costs of your small business can sometimes become a challenge. Every small business will have different operating costs, which can make it hard for you to calculate your operating costs if you are trying to base them off other companies. Understanding your operating costs will help you to open your company but also to keep it open as you know your "break even" point. Typically when you are dealing with the operating costs there are 2 main categories that the costs will break down into:

1. Fixed Costs
2. Variable Costs

Calculating Your Fixed Costs
Let's take a look at the fixed costs first. These are the operating costs that usually stay the same. You will know exactly how much these costs are each month. Usually the fixed costs will include things like your company salaries, leasing costs (warehousing and building lease), insurance, etc. Some of these costs will eventually change but usually they are going to be the same for a set period of time. These are the costs that you know you will always count on. Based on the contract you have with utility companies, you may also include them in here as well as usually you get a flat rate for the internet but your electrical costs will be variable costs as they are subject to change. Hourly wages are another variable costs as they are based on how many hours your employees will work. Add up all of the fixed costs and place them into one category. Then you can get started on your variable costs so you know how much your break-even point will be each month.

Calculating your variable costs
The variable costs are going to include pretty much everything else that was not listed as a fixed cost. These costs are going to be based on how many sales you have each month as sometimes these costs will be higher and other times they are going to be much lower. The common variable costs you will see include your hourly wages, raw goods, utility costs (energy), shipping costs, etc. Your organization may have more or less based on how you set up your accounts.

Knowing the operating costs
In order to acquire any type of financing for your company, a lender is going to ask you about the operating costs. They need to see how much money you need just to keep the business alive and where you plan on generating the sales in order to keep the business alive. If the lender feels that your company is subject to economic declines and may not be able to properly operate, they likely will not give you the financing that you need. This is why you need to have a solid marketing plan and a good financial plan so you can calculate the operating costs and come up with the money you need on your own without involving lenders.

Sometimes you have operating costs that will vary based on the time of the year. In the winter you may need to add in costs to pay for snow removal where the summer you need to pay for landscaping work. Create operating costs that are based monthly and then yearly so you have a good idea where you are at for the entire year. If you have high operating costs you need to consider areas that can be cut. One of the common places to reduce operating costs is with your warehousing costs. Reducing your inventory overhead costs can save you a great deal of money as you may not need to pay for warehousing costs at all and you can set your order points to when customers actually place the orders.

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