Inside the Expenses of Making Money

Inside the Expenses of Making Money

January 18th, 2013 // 10:25 am @

It’s certainly not the most attractive, exciting, enticing part of business or being an entrepreneur, but understanding (and managing) your expenses is critical to wealth building.

Later on we’ll discuss strategies for keeping expenses down, for now I just want to elaborate of the types of expenses.

You will recall our Profit Equation:
Profit = (Units x Price) – Op Exp – Costs of Goods Sold – Marketing

Let’s take a closer look at the three types of expenses we’re dealing with…
1) Operating Expenses
2) Costs of Goods Sold
3) Marketing and Advertising

Operating expenses are essentially the cost of ‘opening your doors’ every month. Even if you make zero sales, these expenses exists. Often called overhead or fixed costs.

While costs of goods sold, or variable costs, only occur when you make a sale or create inventory. Therefore, the more sales you make, the greater the sum of costs of good sold.

Marketing, of course, are the expenses related in selling your product or service.

Let’s use a dentist office as an example. The operating expense would be the building lease, electricity, staff, benefits, phone system – anything that gets paid regardless of patient production. Costs of goods sold would be a patient’s crown or dentures – all costs consumed by delivering patient care. Finally, the marketing expense would be the website, billboard, postcards – anything related to bringing in patients.

Now, there will be some grey areas, such as the inventory of toothbrushes (operating expense or cost of good sold) or the new patient welcome folder (cost of good sold or marketing).

Don’t get caught up on categorizing every expense, instead focus on this concept…

The goal, to achieve maximum profitability, is to shift as many operating expenses to costs of goods sold. This allows you to minimize wasteful spending and remain agile in the market place.

Often times business owners build up huge overhead for convenience or a perceived necessity. Instead of a dentist office hiring an endodontist full time, only bring him or her in when there is a scheduled root canal.  Don’t hire a full time web developer, outsource the projects when needed to avoid the fixed costs.

Inflated overhead is the second leading killer of business (this first is of course the lack of sales).

We’ll tackle the subject of minimizing expenses and optimizing marketing dollars later in the series.

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