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Master Your Money with the Operating Costs Formula

20240619 THK Operating Costs Formula Featured Image

As business owners and operators, we all know how important it is to keep our spending in check. Knowing what money is being spent and managing that spending, especially as costs increase, is crucial to success. A great way to approach budgeting is to understand the operating costs formula. Join us, as we discuss your business’ operating expenses and how you can manage them.

Understanding Operating Costs

Operating costs are all the costs associated with the maintenance and administration of a business. This includes costs of goods sold, payroll, materials, maintenance, and any other operating expenses. For example, farm and landscaping business owners may consider the costs of technology, equipment, labor, and land, among other spendings.

As for costs associated with non-operating activities, like paying interest on a loan, these costs are also tracked, but are sorted separately in the books from operating costs.

The Operating Costs Formula

With this understanding, how do we calculate the operating costs formula?

The operating costs formula is simply the cost of goods sold, plus the operating expenses, equals the operating cost.

𝐶𝑜𝑠𝑡𝑠 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 + 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑜𝑠𝑡

Let’s break this down:

  • When you receive your business’ income statement for a given accounting period, go ahead and look it over.
  • Find a section with the total cost of goods sold (COGS) which may also be called cost of sales. Note the total cost.
  • Further into the statement, you should find an amount for your total operating expenses. Note that number as well.
  • Add the total of the COGS and total operating expenses to find the total operating costs for the period.

Farmer looking over documents next to some tractors.
Operating costs can easily be found with your income statement and can help guide future investments.

Factors Affecting Operating Costs

You should note that operating costs are naturally going to change over time. This is caused by nature and economics.

  • Seasonality: Expenses will fluctuate with the calendar, and the longer you’ve been in business, the more you will understand these fluctuations for your business. Farmers and landscapers, for example, you probably find your business spending more in the fall than you do in the dead of winter.
  • Economic changes: The economy is ever-changing, and those changes will have an impact on your operational costs. Whether it’s inflation, utility costs, or supply chain challenges, the economy’s fluctuations will be a factor in your expenses.
  • Labor market: Your employee-base will also affect your operating costs. Maybe you are hiring more people, or maybe you are needing to give a raise to compete with other businesses to keep your employees. The point is that as labor costs and demands shift, your expenses will, too.

Strategies to Reduce Operating Costs

Now, with all these factors that are somewhat uncontrollable, what can you control? Let’s take a look at a few strategies that may help:

  • Using efficient equipment: Finding the equipment or processes that will save you time, money, and resources is going to save your operating costs. For example, if you are landscaping a large piece of land, using large equipment makes sense, but if you are working on that same piece of land with equipment fitting of a small, suburban backyard, that may not be the most efficient use of equipment.
  • Budget planning and cost forecasting: We mentioned before all the uncontrollable factors, but what if we planned for those changes? With forecasting and preparation, you may find that you can balance your budget for a time by cutting money in one place to pay a higher expense elsewhere.
  • Hiring strategies. How do you go about your hiring process? Seeking out people with a lot of experience and qualifications is always wanted, and you need some, but they come at a cost. Maybe you find that the part-time position you are trying to fill does not necessarily need to be some expert in the industry with 15 years of experience but could be done by a student from the local college, and if it’s the right person, they could do fantastic work for your business for a lower hourly rate.

Find Efficient Solutions with Tomahawk Attachments

Managing your business’ costs is a key to your success and longevity. One of the best ways to reduce your operating costs is to use efficient equipment that makes sense for your business, as offered by Tomahawk Attachments. Finding the right tools is one of the best ways to see your farm or landscaping business is sustainable. Browse the full catalog of Tomahawk Attachments today to start a long-term investment in lower operating costs.

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