Net operating expenses are the total costs associated with running a business, excluding costs related to producing and selling products. Calculating these expenses helps businesses make wise spending decisions and anticipate their total costs over a given period of time. Deducting operating costs from taxes is also a benefit for many businesses.
Net operating expenses are the sum total of all costs associated with operating a business, corporation, or commercial enterprise. In the world of business and finance, the word “net” essentially means “total” or “overall.” There is usually only one requirement for a cost to be considered a net operating cost, which is that it be related to the actual operation of the business, rather than related to the sale or manufacture of a product.
Businesses calculate their net operating expenses as a way to anticipate their total costs over a given period of time, typically a year. It can be very difficult to maintain a balanced budget without having an idea of how much money has to come out to stay afloat. Pre-estimating net operating expenses helps companies make wise spending decisions and often increases overall profit margins.
The most essential feature of a net operating expense is that it is tied specifically to some cost associated with running a business. Any income or property taxes fit this description, as do costs for supplies, utilities, and basic services like phone and internet. Payroll expenses and employee benefits also qualify.
Things get murkier when it comes to production and manufacturing. Costs that are directly associated with producing something that is sold to the public are not operating expenses. Most of the time, these are classified as selling expenses or general expenses. Sales commission expenses, labor costs, and marketing or advertising price are generally included in this category.
From one perspective, costs in both the operating and sales categories are products, so they must be considered together. Most companies, in fact, consider the totals in each column together when looking at overhead. Keeping them separate from the start can be beneficial for a number of reasons, however the first of which is ease of accounting and budgeting.
Most of the time, a business decides how much money it can afford to allocate to selling expenses by first calculating how much it actually costs to be in business in the first place. By critically examining net operating expenses, corporate leaders can make good decisions when it comes to setting aside money for promotion and production. Sales can always be reduced, but that same flexibility may not apply to basic operating expenses.
Taxes are another reason why many companies evaluate net operating expenses independently of other expenses incurred. In many countries, business owners can deduct operating costs from their total taxes due. This benefit is generally limited to costs that are specifically related to staying operational. Deducted business expenses generally must be calculated exactly and adjusted to relate only to the tax year in question.
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