Running a small business requires the same entry and exit of a larger company, but on a much smaller scale. This includes the administrative and operating expenses necessary to make the business run efficiently and be profitable. Operating expenses are the costs necessary to build a product or create the services that a small business sells to a customer. In contrast, administrative expenses are the costs of keeping the company running efficiently.
Operating expenses are the costs incurred by a small company for each of the different departments to produce a product or service for customers.
Operating Expenses Formula
It is calculated by dividing a property’s operating expense (minus depreciation) by its gross operating income and is used for comparing the expenses of similar properties.
Some examples of these departments include manufacturing, advertising and sales. Small companies have a variety of necessary operating expenses. An example is the rental of a building. This space is necessary to produce the product or services for the business. Another example is the manufacturing equipment. This equipment is necessary to produce the product that is sold or to assist in the services provided to consumers.
Administrative expenses are the costs incurred by a small business on a general basis and that are not associated with a specific department. These expenses are grouped with individuals who perform non-technical support activities for a small business, including secretaries and receptionist. An example of an administrative expense would be salaries and benefits for secretaries and receptionists. Another example would be office supplies, telephone bills and mail used for the business.
Most of the operating and administrative expenses incurred during the course of the business are known to be reasonable, ordinary and necessary and can be deducted following Internal Revenue Code section 162. Some expenses are seen as current and must be deducted in the year In which they are used. Some examples of this include wages and income. Other expenses are defined as capital expenses and must be deducted for a certain period of time. An example of this would be a piece of equipment used to create a product.
The difference between operating expenses and administrative expenses can be seen in a small business when the budget needs to be cut. Administrative expenses are always cut first. These costs can be eliminated without damaging the products or services provided. Examples of this would be to reduce the size of the human resources department or change from an individual who performs the services of the reception to an automated voicemail message system. Both are administrative expenses.