Occupancy cost, including rent, property taxes, insurance, and fees, can significantly impact a company’s financial condition. A cost of occupancy ratio can help calculate a reasonable amount to spend, and high ratios may indicate future cash flow problems. Internal financial reports and disclosures can address concerns and inform investors.
Occupancy cost is the expense associated with occupying a premises, such as a manufacturing facility, office, or retail space. It can contribute significantly to overall operating expenses and it is important to take this factor into account in assessments of a company’s financial condition. Businesses also think about this issue when preparing to relocate or open a new location, as they want to ensure that the cost of occupancy does not exceed projected revenue or the business is vulnerable to future cash flow problems. A tool called a cost of occupancy ratio can be used to help a business calculate a reasonable amount of money to spend on this business expense.
Rent or mortgage payments are a major contributor to the cost of occupancy, along with property taxes, insurance, and fees that may be required to operate in a given complex or area. Additionally, a business may have setup costs associated with installing equipment and supplies. Marketing to attract people to a location may be a consideration for retail occupancy cost, as the business wants people to know that the store exists. If a store is in a remote area, more money needs to be spent on marketing to attract customers.
Some costs are fixed, while others may be more flexible. Utilities can change from month to month, as can recurring expenses, like paying a landscaper or having decorating services. Some stores may decorate for holidays, for example, in which case this is part of the occupancy cost because the decorations are used to make the space more attractive to customers. All of these costs can be added together to determine how much money a company spends or expects to spend in a given location.
To find the cost of occupancy ratio, this number can be divided by sales. High ratios may indicate that a company may be at risk of future cash flow problems, because the money generated from sales is very close to the expense of running a facility. Lower ratios show that the company is spending a smaller fraction of its sales on occupancy and therefore has money available to manage other business expenses. In addition, the company can invest in development and other activities to grow over time.
Internal financial reports can discuss the cost of occupancy and ways to control it if there are concerns about the company’s expenses. It can also be a topic of concern when a business applies for loans, since financial institutions want to ensure that a business can afford the cost of debt service. Annual reports and similar financial disclosures also contain this information, for the benefit of investors who want more information about the company’s operating expenses.
Smart Asset.
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