Running a successful business isn’t just about making sales — it’s about managing what you spend to make those sales happen. That’s where operating costs come in. If you’re a business owner, understanding operating costs is key to maintaining healthy profit margins and long-term sustainability. Let’s break down what operating costs are, why they matter, and how you can manage them to boost your profitability.

What Are Operating Costs?

Operating costs (also known as operating expenses or OPEX) are the ongoing expenses required to keep your business running day to day. These include:

• Rent or mortgage for office, rental space, or equipment
• Utilities such as electricity, water, internet, and phone
• Salaries and wages for employees that don’t provide direct labor
• Office supplies and equipment
• Marketing and advertising
• Insurance and licenses
• Maintenance and repairs
• Depreciation & Amortization the depleted value of fixed assets & prepaid expenses

Operating costs do not include the cost of goods sold (COGS), which refers to the direct costs tied to producing your product or service (like raw materials or labor used in manufacturing). Together, COGS and operating costs make up a significant portion of your total business expenses.

How Operating Costs Affect Profitability

Your operating profit or EBIT (earnings before interest & taxes) is essentially what’s left over after all expenses are subtracted from revenue. The equation looks like this:

Operating Profit = Revenue – (COGS + Operating Costs + Other Expenses)

So, if your operating costs are too high, they can quickly eat into your profit margins — even if your revenue looks impressive on paper. Let’s say your business brings in $500,000 annually. If your operating costs are $300,000 and your COGS is $150,000, that leaves you with only $50,000 in profit.

Common Mistakes Business Owners Make

1. Not tracking expenses closely: If you’re not monitoring where your money is going, it’s easy for small, recurring costs to add up and cut into profits.
2. Overstaffing or inefficient labor: Payroll is often one of the biggest expenses. If your team isn’t operating efficiently, you could be losing money.
3. Underutilizing technology: Many business tasks can be streamlined or automated, saving you both time and labor costs.
4. Ignoring fixed vs. variable costs: Fixed costs (like rent) stay the same regardless of output, while variable costs change with production. Knowing the difference can help with budgeting and scaling decisions.

How to Manage Operating Costs

1. Audit your expenses regularly
   Review your operating costs at least quarterly. Look for subscriptions, tools, or services you no longer need.
2. Negotiate with vendors and service providers
   Don’t be afraid to ask for better rates, especially if you’re a long-term customer or bundling multiple services.
3. Invest in energy-efficient solutions
   Lowering utility bills by upgrading lighting, HVAC systems, or machinery can pay off over time.
4. Embrace automation and technology
   Use accounting software, inventory management tools, and CRM platforms to cut down on manual labor and reduce errors.

Keeping a close eye on your operating costs is one of the smartest moves you can make as a business owner. Reducing these costs — even slightly — can significantly improve your bottom line, giving you more flexibility to invest in growth and enjoying a healthier profit margin. Profitability isn’t just about earning more — it’s about spending smart. Control your operating costs, and you’ll put your business in a much stronger position to succeed. Our webinar, Understanding The Profit And Loss Statement, can provide more insights into the key components you need to account for all operating costs.