IMPLEMENT EXPENSE-CONTROL STRATEGIES

2.10Entrepreneurship I

Operating Expenses

A category of expenditure that a business incurs as a result of performing its normal business operations.

Examples include: Production cost (raw materials, utilities, man

hours) Inventory (also, storage and transportation of

inventory) Salaries and Benefits Advertising and Marketing

Source: http://www.businessdictionary.com/definition/operating-expenses.html#ixzz1yCPMvHSz

Operating Expenses effects on Profit

Operational costs involve any expenses related to running your business, such as labor and office costs. Profit margin serves as the percentage of profit made from each sale. Operational expenses have a direct effect on your business' profit margin. This number tells a story of how well you controlled expenses, which can help or hurt in attracting investors and bolstering your company’s stock.

What are ways to reduce operating costs?

Operating Expenses effects on Profit (cont.)

Ways to reduce operating expenses1. Lower labor costs by placing an emphasis on

high employee performance.2. Reduce waste. Order enough materials to run

your business but not in excess.3. Lower utility costs4. Set a marketing budget5. Reduce travel expenses6. Purchase used equipment instead of new.

Operating expenses and selling prices

How would operating expenses affect selling price? If operating expenses are high the business

would be forced to charge the customer more to cover those expenses.

If operating are kept to a minimum, business can charge less, which will result in more sales.

* It is important for businesses to create a budget in order to track operating expenses and make adjustments as needed.

Fixed Costs

A cost that does not change with an increase or decrease in the amount of goods or services produced.

Examples include: Lease, Insurance, salaries

Source: http://www.investopedia.com/terms/f/fixedcost.asp#ixzz1yCQa37fz

Variable costs

A corporate expense that varies with production output.

Examples include: Material, labor, and utilities.

Source: http://www.investopedia.com/terms/v/variablecost.asp#ixzz1yCRo3NYf

Semi-Variable Costs

A cost composed of a mixture of fixed and variable components. Costs are fixed for a set level of production or consumption, becoming variable after the level is exceeded.

An example is labor, which is fixed for 40 hours then variable as overtime is paid.

Source: http://www.investopedia.com/terms/s/semivariablecost.asp#ixzz1yCSv4HZa

Gross Profit

A company's revenue minus its cost of goods sold.

Company A and Company B both have $1 million in sales. Company A's cost of goods sold (COGS) is $900,000 and Company B's COGS is $800,000. Company A's gross profit will be $100,000 and Company B's gross profit will be $200,000. Company B spends less money to make the same amount of sales, and is therefore more efficient.

Source:: http://www.investopedia.com/terms/g/grossprofit.asp#ixzz1yCUagBoE

Break-Even Point

A company's break-even point is the amount of sales or revenues that it must generate in order to equal its expenses. In other words, it is the point at which the company neither makes a profit nor suffers a loss.

Source: http://www.investopedia.com/terms/b/breakevenpoint.asp#ixzz1yCVNOFdJ