It’s the most wonderful time of the year when companies large and small are wondering how they can reduce next year’s operating costs. If you’re not wondering, or you haven’t forecast your company’s, or your group’s, upcoming costs, take the time to investigate now and potentially set up your company for a better 2014.
This is especially important if you’re just looking to launch or finish developing a product. The overall cost of everything is given to rise year after year, even the basics if you’re paying attention – food, gas, utilities, insurance. These increases impact your business’ every day spend, even before the product gets out the door (or escapes, as one of my friends likes to term it).
Why is this important (other than you should know where the company is spending its money)? The lower the company’s operating costs or ratio to costs of goods sold, the more profitable a company generally is. At the end of the post is a basic calculation for how to get to the ratio.
Expenditures for core business operations, such as production costs, salaries and benefits, rent and utilities, sales and marketing and inventory are numbers which should all be included.
Pick a timeframe to conduct the information gathering – whether it’s the past fiscal year, past 6 months, or somewhere in between Looking at the numbers over a period of time will help you identify variances (or variables), areas where there could be potential savings, or areas where spending will possibly rise.
It’s a rare company that doesn’t have to horse trade currently running expenditures vs. future spend planning; who wouldn’t want an uncapped operations budget? For the rest of us, by analyzing where the company encountered bumps, unanticipated (or anticipated) increases in operations spending will give us information as to how the next set timeframe will look. Even the simplest things such as giving your employees a raise will be reflected on how the additional cost plays out over the timeframe.
As mentioned above, if you want to take this a step further and see where your company’s operating ratio lands (and you have the other pieces of financial data on hand), test out the formula below and see what percentage comes back.
Operating Ratio = Operating Expenses / Net Sales (for the same period of time)
Here’s a useful description of what the resulted number means.
At a high level, any ratio less than 100 means there’s some profit being generated in the company. Anything over means that for every $1 in sales, your company is spending that dollar + x% to make the sale. It also indicates the company is running at a deficit due to some circumstance.
Regardless of what your operations analysis resulted in, the numbers are important to not only track, but to assess at specific points to see how and where the money is really being spent vs. budgeted for in your company.
How often do you review your company’s operating expenses? Have you found any surprises?