How to Calculate Operating Expenses for Your Service Business
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- How to Calculate Operating Costs
Tracking how much money you’re making is a major part of monitoring your service business’s success. But if you aren’t also tracking your operating expenses, you aren’t getting a full picture of how profitable your business actually is.
Operating expenses, like office rent, utilities, and employee wages make up some of your biggest—and most important—costs. Which is why it’s so important to regularly calculate, review, and adjust them to ensure they aren’t eating up your profit.
Learn how to calculate operating expenses to keep your business in the green so you can focus on long-term profitability in this guide.
Everything you need to know about operating expenses:
What are operating expenses?
Operating expenses, or OpEx, are the necessary, ongoing costs required to run your service business, such as:
- Sales and marketing expenses
- Office rent or property management fees
- Field service software
- Administrative and accounting software
- Utilities
- Office supplies
- Legal fees
- Labor costs like salaries, wages, and subcontractor fees
- Insurance
- Repair and maintenance costs
- Depreciation costs or amortization
COGS (cost of goods sold) also counts as an operating cost. For service businesses, these are typically products or parts. Like the fertilizer a lawn care business sells, or a replacement furnace from an HVAC company.
Typically, operating expenses are divided into three categories: fixed costs, variable costs, and semi-variable costs.
- Fixed expenses are expenses that don’t change or fluctuate over time, like rent or insurance.
- Variable expenses are fluctuating costs that are influenced by outside factors, like utilities and payroll.
- Semi-variable expenses are costs that can remain relatively stable or occasionally fluctuate, like fuel and overtime pay.
Separating your operating expenses into these categories is a way to monitor and plan for your costs over time.
For example, after tracking your variable expenses for a year, you’ll be able to see how and when they’re impacted by seasonality so you plan to set aside additional funds to cover costs at a specific time. Grouping fixed costs together also shows you which bills are always the same so you can make sure to bring in enough work and budget accordingly.
What is overhead?
Overhead is part of your operating costs and includes any indirect expenses needed to complete a job, like insurance and equipment maintenance or repairs. Overhead costs generally count as operating expenses but can be calculated separately to determine how they can be reduced or adjusted.
READ MORE: Overhead costs: a complete guide for service businesses
How to calculate operating expenses
To calculate your operating cost, start by choosing a timeframe, such as a week, month, quarter, or year.
From there, make a list of all the expenses you have within that period, from cell phone bills and gas to electricity and job supplies and add them up.
Next, calculate your COGS for the same timeframe. For example, the cost of grass seed or salt you purchased ahead of the busy season for your lawn care or property maintenance business.
Then, add your two numbers together.
Use this operating expense formula to calculate your own operating expenses:
Operating expenses + COGS = Operating cost
For example, let’s say your total operating expenses for a month were $10,000 and the COGS was $5000. Your monthly operating cost would be $15,000.
Pro Tip: If you’re looking for more in-depth information about your expenses, try using an AI tool like Jobber Copilot. It can analyze your revenue, quotes, clients, employees, and invoices to help you stay on top of expenses and identify where you can adjust costs.
Why are operating expenses important?
Operating expenses don’t just tell you how much you’re spending. When combined with your total revenue, they show you what your business’s short- and long-term health looks like.
This information helps you to:
1. Determine a good profit margin
Your profit margin is what ensures you not only cover expenses but make money. It’s what prevents you from simply breaking even, or worse, losing money. Knowing your expenses is essential to calculating and setting your profit margin because it tells you the minimum amount you need to charge to cover costs.
2. Calculate markup
Markup ensures you make more on each job than what it costs. Where your profit margin is the amount you take home after deducting the costs of a job, markup is how much you charge on top of job costs to make a profit. For example, if the total cost of a job is $100, and you charge the client $125, you have a $25 or 25% markup.
When you determine your operational expenses you’ll have a baseline for what you need to charge on each job to make money.
3. Set prices
Your expenses play a major role in your pricing strategy. Understanding how much you need to spend on things like rent, utilities, and employee wages gives you a starting point for setting your service pricing. Knowing your operating expenses helps you make an informed decision about how much you charge.
4. Financial modeling or budget planning
Calculating your costs regularly means you’ll have a more accurate budget, allowing you to plan for future expenses, make informed pricing decisions, and decide when and where to adjust your spending.
5. Avoid financial risks
When you pay attention to operating costs on an ongoing basis, it’s easy to see when they increase, giving you a chance to navigate a potential issue before it becomes a major problem. Like if costs increase from a wholesaler or you go over your marketing budget.
6. Grow your business
The lower your expenses, the more profit you have to invest in growing your business.
7. Keep an eye on costs
Monitoring operating expenses means you can cut, add, or adjust costs as necessary to increase operational efficiency and optimize how your money is being used. For example, by negotiating a lower insurance rate or using field service management software like Jobber to send quotes and invoices.
How to reduce operating expenses
Operating costs are necessary to keep your service business running smoothly, but that While operating costs are necessary to keep your service business running smoothly, knowing when and how to reduce them will ensure you’re not spending more than you have to.
Reducing operating costs is one of the best ways to boost profit without increasing your prices, so you’ll have more profit to invest back in your business or grow your team.
Consider how you can reduce your operating costs by following these tips:
1. Cut unnecessary costs
If you’re paying for anything you don’t use, like a software subscription you only use on occasion or an industry-specific magazine that you never read.
2. Renegotiate expenses
Costs like cell phone and internet bills are typically negotiable, especially if you need a group plan or corporate rate. If your costs seem high, give your provider a call and ask what your options are. If they don’t have any that fit your budget, shop around for another provider to see what’s available.
3. Downsize your office space
If you pay rent for an office, consider whether you can downsize or even get rid of it altogether. Most administrative and accounting work can be done from home, so if you can make the switch to remote, you could save a lot of money. If that’s not an option, think about what you actually use your office space for and whether you could make something more cost-effective work, like a smaller space or renting in a different area.
4. Hire subcontractors
Bringing on subcontractors for seasonal and part-time work prevents you from hiring employees, saving you money on payroll taxes and health benefits. You can always hire an employee once the work is consistent enough to support them.
5. Review your operating expenses regularly
Keeping track of costs is essential for understanding when and how you can cut them. This shows you where you’re spending the most and whether you’re sticking to your budget, highlighting areas to review for potential overspending and cuts.
If you aren’t sure where to start, begin by tracking operating expenses each month until you have a good idea of what’s coming in and going out. Then, when spending is consistent, do a deep dive at least every quarter.
6. Use software to handle the heavy lifting
Field service management software like Jobber can take on a variety of tasks for you. You can use it to manage online bookings, schedule service appointments, build your website, and automate marketing campaigns
Having these tools in one place doesn’t just save you money, it also makes it easier for you to run your business more efficiently, giving you time to focus on how to use that extra profit to fuel growth.
Want to know more? Watch this episode of Ask a Business Mentor to hear four industry experts share their typical operating costs and how to reduce them:
Originally published in June 2021. Last updated on October 28th, 2024.
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