What Are Operating Expenses and How Do You Track Them?

There is an old saying in business that "what can be measured can be managed," and that  certainly applies to financial transparency. Smart organizations don't just know how much money they have going in and out; they understand where each dollar goes and why. Deep visibility into financial data is also foundational to optimizing operations and making informed strategic decisions. Without, you are in many ways flying blind. 

This goes well beyond simple revenue calculations. While those numbers are rightly highlighted, operating expenses are often the best representation of day to day financial reality, and weigh heavily on cash flow and profitability. 

This means it's important to understand operating expenses and to ascertain the key patterns and relationships that reside within your cost structure. If you can master expense management, for example, you can often improve the quality of your business offerings while keeping costs under control and creating more predictable and sustainable financial performance. 

Tracking expenses and using that raw data to create actionable insights can be transformative, but you need the right understanding of expense categories, management approaches, and software tools to get there. 

What are operating expenses? 

Operating expenses (shortened to OpEx) are the ongoing costs to run a business. Think about recurring expenses needed to maintain business operations and earn revenue. These aren't capital expenditures which involve buying long-term assets, but expenses consumed within the current accounting period. Operating expenses are things such as rent, salaries, utilities and supplies, whereas capital expenditures (CapEx) includes things like buildings and equipment that depreciate over time and have long term value. 

Operating expenses have a major influence on cash flow and profitability, as they are baseline costs for running a business and often the largest portion of total expenses. They can often give you deep insight into how efficient and sustainable your business model is, and companies that have this understanding generally are more financially stable. 

Operating expenses can be divided into fixed or variable categories. Fixed expenses such as rent or insurance remain constant, while variable expenses (such as sales commissions) can fluctuate over time. This distinction is important for understanding cost control and budgeting, as fixed expenses can become an issue during slow periods and variable expenses must be monitored over time as business needs change. 

Some other categories of operational expenses include the following: 

Infrastructure costs or facility costs 

• Personnel costs 
• Marketing or client acquisition costs 
• Office supplies and materials 
• Travel and entertainment 
• Professional services 
• Insurance and risk management 

Another distinction is direct vs. indirect spend, with direct spend being expenses tied to producing goods and services and indirect spend being expenses that are not directly tied. Think raw materials (direct) vs. rent (indirect). 

Why is tracking operating expenses important? 

Now that we've talked about expenses, let's walk through why expense visibility is so important. 

To run your business effectively, you need financial transparency and visibility. Opacity is the enemy of efficient management, as leaders can only optimize and spot financial problem areas when they know precisely how money is being spent. 

Visibility into operating expenses is crucial because it lets you make data-informed decisions about choosing or retaining vendors, resource allocation, and what to prioritize in terms of spending. If you can see which departments or projects are consuming the most resources and measure that against performance, you can begin to optimize your resource deployment. 

Getting a handle on your expense patterns also enables you to benchmark vs. industry standards, internal numbers and trends over time. Running this kind of analysis can show if spending levels are justified and shows potential improvement areas. 

Visibility into expense data also enables accurate budget planning and forecasting, as it becomes possible to identify cost patterns and seasonal variations, along with expenses related to growth. Sharper, more feasible budgets help better prepare you for the financial needs of the future. 

Finding financial risks before they spiral out of control should be a priority for all financial leaders, and expense visibility can help pinpoint odd spending patterns, accelerated cost increases, and vendor/client concentration risk. 

Finally, if you have detailed expense analysis, it becomes easier to spot inefficiencies and consolidation opportunities. All those duplicate software subscriptions, and underused services add up. 

How to manage operating expenses more effectively 

Before we conclude, let's run through some guidance for effective expense management, showing you how to improve your capabilities while minimizing unnecessary costs. 

Regular expense reviews can help you spot trends and unusual spending patterns and give you the insight you need for optimization. Make sure to get all department managers onboard so you have a holistic view. 

Negotiate your vendor contracts in a strategic way to ensure good service and fair pricing. If you can consolidate to leverage volume pricing, consider doing so, but don't assume the risk that comes with vendor over-consolidation. 

Compare your actual expenses with your budgeted amounts to understand any variance. This will help you spot any area where spending is out of control and take fast corrective steps. 

Controlling your discretionary spending is also important, so you'll need clear policies governing things like travel and entertainment expenses. Deploying an advanced expense management platform such as SAP Concur can help you automate these policies and ensure that all expenses are justified and accurately processed at scale. 

Expense management platforms such as SAP Concur also provide what we talked about earlier: Real-time visibility into where your money is going. Data analytics can help you spot optimization and resource allocation opportunities, while also enabling strategic, data-informed decisions. 

The Takeaway 

Understanding your operating expenses is a foundational aspect of running an efficient and successful business. By creating the right frameworks and adopting the most advanced software tools, you can help ensure that you stay on top of all challenges.  

By using a platform like SAP Concur, you can benefit from total visibility into spending patterns, automated policy enforcement, and employee-friendly features like on-the-go mobile expense submission. SAP Concur solutions lower the burden associated with manual expense submissions and approvals, leading to faster reimbursements and happier employees. 

Advanced data analytics within SAP Concur solutions help provide that all-important financial visibility, while also creating clear audit trails, ensuring compliance mandates are met. 

To learn more, contact us.