Operating Costs are the expenses associated with operating a business on a day-to-day basis. The expenses include all costs to operate, but generally can be broken down into two main categories – maintenance and administration. Maintenance costs deal more with the product (manufacturing, upkeep, improvements), while administration costs deal with paperwork and employees, like payroll, accounting and bank fees, office rent, etc.
Furthermore, your operating costs can be broken down into two other categories – fixed costs and variable costs. Your fixed costs are expenses that do not change regardless of how your business is performing or how much of your product you’re selling. An example of a fixed cost is rent – it doesn’t matter how much of your product you sold in a given month, rent will still be the same. A variable cost is a cost that is subject to change depending on business performance. An example of variable cost is payroll – if your company is selling 5x the amount of product as it did before, then it may need to hire more employees to deal with the new customers, thus the payroll expense increases with strong business performance. Overall, it’s important to keep operating costs low and to calculate your operating cost so you know how much revenue your business needs to be profitable.