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Operating expenses






BUSINESS OBJECTIVES

Topic 1. Connection between pre-tax profit, operating expenses and turnover

Pre-tax profit

If pre-tax profits are too low or absent, the business will not be able to pay wages and salaries its workers and employees, and so will lose them. Neither will the business pay dividends to its stockholders, so the price of stocks will fall at the stock exchange. Since there will be no money to pay interests on loans taken, the business will lose credit with its banks. No one will lend money to this firm or company. It will not be able to buy what it wants in raw materials, services, or whatever is needed for production. Suppliers will stop providing supplies. Finally, there will be no money for investing in expansion and growth. Low profits will mean that the business cannot compete with other businesses. Such a situation cannot last long. If the firm or company does not find ways to increase its pre-tax profits, it will go out of business. That is just what has happened when a firm is bought out or taken over by another company.

Operating expenses

An operating expense (operating expenditure, operational expense, operational expenditure, OPEX) is an ongoing cost for running a product, business, or system.

Its counterpart, a capital expenditure (CAPEX), is the cost of developing or providing non-consumable parts for the product or system.

In business, an operating expense is a day-to-day expense such as sales and administration, or research & development. It is the money the business spends in order to turn inventory into throughput.

On an income statement, “operating expenses” is the sum of a business's operating expenses for a period of time, such as a month or year.

In throughput accounting, the cost accounting aspect of the theory of constraints (TOC), operating expense is the money spent turning inventory into throughput. In TOC, operating expense is limited to costs that vary strictly with the quantity produced, like raw materials and purchased components. Everything else is a fixed cost, including labour (unless there is a regular and significant chance that workers will not work a full-time week when they report on its first day).

In a real estate context, operating expenses include costs associated with the operation and maintenance of an income-producing property.

Operating expenses include:

§ accounting expenses

§ license fees

§ maintenance and repairs, such as snow removal, trash removal, janitorial service, pest control, and lawn care

§ advertising

§ office expenses

§ supplies

§ attorney fees and legal fees

§ utilities, such as telephone

§ insurance

§ property management, including a resident manager

§ property taxes

§ travel and vehicle expenses


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