From the day a business opens its doors, operating expenses such as rent, payroll and office supplies are a necessary part of daily life. If you’re running a business, one of your major financial goals should be to ensure your operating expenses stay well below your gross profits. Learning how to calculate average operating expense percentages and striving to meet an acceptable margin is paramount to your long-term success.
A business’s operating expenses vary depending on the type of products or services offered. An accountant or freelance graphic designer may be able to launch a startup from a home office using existing equipment. There will still be costs related to networking and marketing, but they'll only take up a small percentage of the gross profits in the beginning.
For many businesses, renting their office, store or warehouse space is part of their general operations. A retail store needs a storefront, for instance, as well as inventory, shelving and at least one employee to help with some shifts. In addition to payroll and rent, you’ll also have the cost of travel to meet with clients, signage, website design, business cards, telephone, utilities and much more.
If all goes as planned, your business will begin making money. Your gross profit is the money you make on each item after you’ve deducted the cost to manufacture it. If you’re a service-based business, it’s the money left over after deducting the cost of supplies, equipment and labor to provide that service.
It can be difficult to say exactly how much gross profit a business should make since it can vary dramatically from one type of business to another. For example, a financial institution will have a wider profit margin than a restaurant, which can survive on much slimmer profits.
Operating Profit Margin
To get an overall picture of the ideal profit margin, you’ll first need to know how to crunch the numbers. Your operating expense ratio is your operating expenses divided by your revenue. If you bring in $100,000 a month in gross profits and spend $20,000 on operating expenses, your profit margin is 20 percent.
You can compare your overall operating profit margins to the S&P 500 to see how successful companies operate. In 2017, the average margin for an S&P 500 company was 11 percent, so if your margins are lower, you’re doing better than the market. But you don’t need to have the lowest profit margins on the block to be successful. Find a place where you’re most comfortable and make it your goal to operate from there.
Stephanie Faris is a novelist and business writer whose work has appeared on numerous small business blogs, including Zappos, GoDaddy, 99Designs, and the Intuit Small Business Blog. She worked for the State of Tennessee for 19 years, the latter six of which were spent as a supervisor. She has written about business for entrepreneurs and marketing firms since 2011.