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What Are Operating Costs?

Understanding operating costs.

• Calculation

Fixed Costs

Variable costs, semi-variable costs.

• Real-World Example
• SG&A vs. Operating Costs
• Limitations
• Operating Cost FAQs
• Corporate Finance

Operating Costs Definition: Formula, Types, and Real-World Examples

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Operating costs are associated with the maintenance and administration of a business on a day-to-day basis. Operating costs include direct costs of goods sold (COGS) and other operating expenses—often called selling, general, and administrative (SG&A)—which include rent, payroll, and other overhead costs, as well as raw materials and maintenance expenses. Operating costs exclude non-operating expenses related to financing, such as interest, investments, or foreign currency translation.

The operating cost is deducted from revenue to arrive at operating income and is reflected on a company’s income statement .

Key Takeaways

• Operating costs are the ongoing expenses incurred from the normal day-to-day of running a business.
• Operating costs include both costs of goods sold (COGS) and other operating expenses—often called selling, general, and administrative (SG&A) expenses.
• Common operating costs in addition to COGS may include rent, equipment, inventory costs, marketing, payroll, insurance, and funds allocated for research and development.
• Operating costs can be found and analyzed by looking at a company's income statement.

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Businesses have to keep track of operating costs as well as the costs associated with non-operating activities, such as interest expenses on a loan. Both costs are accounted for differently in a company's books, allowing analysts to determine how costs are associated with revenue-generating activities and whether the business can be run more efficiently.

Generally speaking, a company’s management will seek to maximize profits for the company. Because profits are determined both by the revenue that the company earns and the amount the company spends in order to operate, profit can be increased both by increasing revenue and by decreasing operating costs. Because cutting costs generally seems like an easier and more accessible way of increasing profits, managers will often be quick to choose this method.

Trimming operating costs too much can reduce a company’s productivity and, as a result, its profit as well. While reducing any particular operating cost will usually increase short-term profits, it can also hurt the company’s earnings in the long term.

For example, if a company cuts its advertising costs, its short-term profits will likely improve since it is spending less money on operating costs. However, by reducing its advertising, the company might also reduce its capacity to generate new business such that earnings in the future could suffer.

Ideally, companies look to keep operating costs as low as possible while still maintaining the ability to increase sales.

How to Calculate Operating Costs

The following formula and steps can be used to calculate the operating cost of a business. You will find the information needed from the firm's income statement that is used to report the financial performance for the accounting period.

Operating cost = Cost of goods sold + Operating expenses \text{Operating cost} = \text{Cost of goods sold} + \text{Operating expenses} Operating cost = Cost of goods sold + Operating expenses

• From a company's income statement, take the total cost of goods sold, or COGS, which can also be called cost of sales.
• Find total operating expenses, which should be further down the income statement.
• Add total operating expenses and COGS to arrive at the total operating costs for the period.

Types of Operating Costs

While operating costs generally do not include capital outlays, they can include many components of operating expenses , such as:

• Accounting and legal fees
• Bank charges
• Sales and marketing costs
• Travel expenses 
• Entertainment costs
• Non-capitalized research and development expenses
• Office supply costs
• Repair and maintenance costs
• Utility expenses
• Salary and wage expenses

Operating costs will also include the cost of goods sold, which are the expenses directly tied to the production of goods and services. Some of the costs include:

• Direct material costs
• Direct labor
• Rent of the plant or production facility
• Benefits and wages for the production workers
• Repair costs of equipment 
• Utility costs and taxes of the production facilities

A business’s operating costs are comprised of two components, fixed costs and variable costs , which differ in important ways.

A fixed cost is one that does not change with an increase or decrease in sales or productivity and must be paid regardless of the company’s activity or performance. For example, a manufacturing company must pay rent for factory space, regardless of how much it is producing or earning. While it can downsize and reduce the cost of its rent payments, it cannot eliminate these costs, and so they are considered to be fixed. Fixed costs generally include overhead costs, insurance, security, and equipment.

Fixed costs can help in achieving economies of scale , as when many of a company’s costs are fixed, the company can make more profit per unit as it produces more units. In this system, fixed costs are spread out over the number of units produced, making production more efficient as production increases by reducing the average per-unit cost of production. Economies of scale can allow large companies to sell the same goods as smaller companies for lower prices.

The economies of scale principle can be limited in that fixed costs generally need to increase with certain benchmarks in production growth. For example, a manufacturing company that increases its rate of production over a specified period will eventually reach a point where it needs to increase the size of its factory space in order to accommodate the increased production of its products.

Variable costs , like the name implies, are comprised of costs that vary with production. Unlike fixed costs, variable costs increase as production increases and decrease as production decreases. Examples of variable costs include raw material costs and the cost of electricity. In order for a fast-food restaurant chain that sells french fries to increase its fry sales, for instance, it will need to increase its purchase orders of potatoes from its supplier.

It's sometimes possible for a company to achieve a volume discount or "price break" when purchasing supplies in bulk, wherein the seller agrees to slightly reduce the per-unit cost in exchange for the buyer’s agreement to regularly buy the supplies in large amounts. As a result, the agreement might diminish the correlation somewhat between an increase or decrease in production and an increase or decrease in the company’s operating costs.

For example, the fast-food company may buy its potatoes at $0.50 per pound when it buys potatoes in amounts of less than 200 pounds. However, the potato supplier may offer the restaurant chain a price of $0.45 per pound when it buys potatoes in bulk amounts of 200 to 500 pounds. Volume discounts generally have a small impact on the correlation between production and variable costs, and the trend otherwise remains the same.

Typically, companies with a high proportion of variable costs relative to fixed costs are considered to be less volatile, as their profits are more dependent on the success of their sales. In the same way, the profitability and risk for the same companies are also easier to gauge.

In addition to fixed and variable costs, it is also possible for a company’s operating costs to be considered semi-variable (or “semi-fixed"). These costs represent a mixture of fixed and variable components and can be thought of as existing between fixed costs and variable costs. Semi-variable costs vary in part with increases or decreases in production, like variable costs, but still exist when production is zero, like fixed costs. This is what primarily differentiates semi-variable costs from fixed costs and variable costs.

An example of semi-variable costs is overtime labor. Regular wages for workers are generally considered to be fixed costs, as while a company’s management can reduce the number of workers and paid work hours, it will always need a workforce of some size to function. Overtime payments are often considered to be variable costs, as the number of overtime hours that a company pays its workers will generally rise with increased production and drop with reduced production. When wages are paid based on conditions of productivity allowing for overtime, the cost has both fixed and variable components and is considered to be a semi-variable cost.

Real-World Example of Operating Costs

Below is the income statement for Apple Inc. (AAPL) for the year ending Sept. 25, 2021, according to its annual 10-K report:

• Apple reported total revenue or net sales of $365.8 billion for the 12-month period.
• The total cost of sales (or cost of goods sold) was $213 billion, while total operating expenses were $43.9 billion.
• We calculate operating costs as $213 billion + $43.9 billion.
• Operating costs (cost of sales + operating expenses) were $256.9 billion for the period.

Apple's total operating costs must be examined over several quarters to get a sense of whether the company is managing its operating costs effectively. Also, investors can monitor operating expenses and cost of goods sold (or cost of sales) separately to determine whether costs are either increasing or decreasing over time.

SG&A vs. Operating Costs

Selling, general, and administrative expense (SG&A) is reported on the income statement as the sum of all direct and indirect selling expenses and all general and administrative expenses (G&A) of a company. It includes all the costs not directly tied to making a product or performing a service—that is, SG&A includes the costs to sell and deliver products or services, in addition to the costs to manage the company.

SG&A includes nearly everything that isn't in the cost of goods sold (COGS). Operating costs include COGS plus all operating expenses, including SG&A. 

Limitations of Operating Costs

As with any financial metric, operating costs must be compared over multiple reporting periods to get a sense of any trend. Companies sometimes can cut costs for a particular quarter, which inflates their earnings temporarily. Investors must monitor costs to see if they're increasing or decreasing over time while also comparing those results to the performance of revenue and profit.

What Is the Total Cost Formula?

The total cost formula combines a firm's fixed and variable costs to produce a quantity of goods or services. To calculate the total cost, add the average fixed cost per unit to the average variable cost per unit. Multiply this by the total number of units to derive the total cost.

The total cost formula is important because it helps management calculate the profitability of their business. It helps managers pinpoint which fixed or variable costs could be reduced to increase profit margins . It also helps managers determine the price point for their products and compare the profitability of one product line versus another.

How Do Operating Costs Affect Profit?

Operating costs that are high or increasing can reduce a company's net profit . A company's management will look for ways to stabilize or decrease operating costs while still balancing the need to manufacture goods that meet consumer demands. If operating costs become too high, management may need to increase the price of their products in order to maintain profitability. They then risk losing customers to competitors who are able to produce similar goods at a lower price point.

What Is the Difference Between Operating Costs and Startup Costs?

Operating costs are the expenses a business incurs in its normal day-to-day operations. Startup costs, on the other hand, are expenses a startup must pay as part of the process of starting its new business. Even before a business opens its doors for the first time or begins production of a new product, it will have to spend money just to get started.

For example, the business may need to spend money on research and development, equipment purchases, a lease on office space, and employee wages. A startup often pays for these costs through business loans or money from private investors. This contrasts with operating costs, which are paid for through revenue generated from sales.

Apple. " Form 10-K, Apple Inc. ," Page 29.

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Operating Costs: An In-depth Analysis of Business Expenses

✅ All InspiredEconomist articles and guides have been fact-checked and reviewed for accuracy. Please refer to our editorial policy for additional information.

Operating Costs Definition

Operating costs refer to the expenses associated with the day-to-day functioning of a business, including salaries, rent, utilities, inventory costs, marketing, and other administrative expenses. They do not include costs related to debt, taxes, or investments in infrastructure or equipment.

Types of Operating Costs

In our exploration of operating costs, we find that these expenses break down into two main categories – fixed costs and variable costs. How a business manages these costs has significant implications for their overall profitability.

Fixed Costs

Fixed costs, as the name suggests, are expenses that remain constant regardless of the business's level of output or activity. These don't change with the volume of goods or services produced. Examples of fixed costs typically include rent for office space, salaries, insurance, and depreciation.

Say, for example, you run a small manufacturing unit. Your rent remains the same whether you manufacture one item or a hundred in a given period. These costs have to be paid, regardless of your business's sales performance. Thus, they're known as 'fixed.'

These expenses are a challenge because they need to be paid even when a business is not generating sufficient revenue. Therefore, a good understanding of your fixed costs allows for better planning and can help maintain profitability, especially during downturns.

Variable Costs

On the other hand, variable costs change in direct proportion to the level of production or business activity. These costs increase or decrease based on the volume of output.

Costs such as raw materials, electricity for manufacturing, direct labor costs, and shipping are considered variable costs. For instance, if you're producing more items in your manufacturing unit, you'll need more electricity and raw materials. Similarly, you might need less if you scale down production.

Variable costs present a different kind of challenge. If not managed well, an increase in these costs may lead to a decrease in profitability, even if sales are booming. Therefore, tracking and optimal usage of resources become crucial in keeping variable costs under control.

By understanding the difference between fixed and variable costs, it becomes easier to allocate resources, set appropriate pricing, and ultimately, improve profitability.

Calculating Operating Costs

In the process of calculating operating costs, organizations will generally utilize financial data segmented by operating hours, work shifts, fiscal quarters, or full years, among other time periods. There are several key components to take into account when calculating these costs.

Labor Costs

Labor costs often represent one of the larger expenses for many businesses. This component of operating costs includes all costs associated with employees, such as salaries or wages, benefits, payroll taxes, and any costs linked to recruiting and training new staff members.

To calculate labor costs, you'd take the total number of hours worked times the average wage, then add in the cost of benefits and other expenses. Remember to include all employees, from temporary hires, part-time employees, contractors, to full-time staff.

Material Costs

Material costs, which vary greatly between industries, are the expenses related to the physical goods needed for a business to operate efficiently. For manufacturing companies, this could include raw materials used in the creation of a product, while a restaurant would count the food they serve as part of their material costs.

When calculating this cost component, you sum up the cost of all materials consumed in your operating activities. Should your demand or prices fluctuate over the period you're looking at, you may need to calculate average costs or use other methods to reach accurate figures.

Overhead Costs

Overhead costs are the business expenses that are not directly linked to the production or selling of goods or services but are essential for the business to function. These include rent or mortgage payments, insurance, equipment and utility bills (electricity, internet, etc.), and depreciation and amortization of assets, among others.

Calculating overhead costs may seem tricky because they often compose a mix of fixed, variable, and semi-variable costs. A good practice is to strictly categorize these costs and then add them up for the specific time period.

By understanding and analyzing these various components of operating costs, an organization gives itself the power to improve its efficiency, increase profitability, and make more informed decisions. The structure for the calculation is simple: Labor Costs + Material Costs + Overhead Costs = Operating Costs. But learning to minimize and manage these costs brings in the real competitive edge.

Operating Costs and Pricing Strategy

Understanding operating costs is fundamental to creating an effective pricing strategy for any business. They represent the direct and overhead costs incurred to operate a business, and they impact pricing decisions significantly.

How Operating Costs Influence Pricing Strategy

In essence, a business aims to cover its operating costs and generate profit. Therefore, understanding the level of these costs can give a business the insight necessary to place a price tag on its products or services that not only covers these expenses but also leaves a margin for profit.

Every product sold needs to at least generate enough revenue to cover the fraction of operating costs attributable to its production and sale. If a business underestimates its operating costs, it may incorrectly set lower prices and will likely face difficulties trying to cover these costs, inevitably damaging profitability.

On the other hand, if operating costs are overestimated, prices may be set too high compared to competitors offering the same goods or services, which could push customers away. Thus, understanding the true operating costs helps a business set prices that are both profitable and competitive.

Operating Costs Effects on Profitable and Competitive Prices

The pricing strategy also should consider competitor pricing and the usual market value for the product or service. If your operating costs are significantly higher than your competitors, and consequently your prices are too, you may need to consider how you're operating and whether there are areas you can reduce costs.

While high operating costs challenge profitability, they can also provide opportunities. If a business can justify higher costs due to superior quality or unique aspects of its product or service, it could leverage these factors to justify a higher price point. This could potentially increase profits and set the product apart from competitors even with a higher price tag.

Overall, understanding the role of operating costs in determining prices helps businesses to set prices that adequately cover those costs, target a decent profitability margin and remain competitive in the market. The ability to accurately estimate and manage these costs is therefore vital for any successful business.

Operating Costs vs Capital Costs

Operating Costs and Capital Costs, though both significant for a business, serve different purposes and are treated differently in financial accounting.

Understanding Capital Costs

Capital costs are one-time expenditures that a company incurs when it buys assets that improve its operations for a long period, typically over a year. These costs, also known as capital expenditure or CapEx, could include expenses like purchasing a new property, upgrading equipment, or investing in technologies. Capital costs are considered an investment in the company's future performance and productivity.

Financial Accounting Treatment

In financial accounting, capital costs are not fully expensed during the purchasing year because their benefits extend over a long period. Instead, they are capitalized as an asset and then depreciated or amortized over their useful economic lives. This spreading out of costs allows a better match between expenditure and the income generated from these assets. It also reduces the tax liability in the first years of purchase as depreciation and amortization are tax-deductible.

Implications on Cash Flow

While capital costs have an immediate impact on cash flow – the purchase of an asset results in an outflow of cash – the impact on the income statement is gradual and spread across years. This is demonstrated in the cash flow statement, where the purchase of an asset falls under investing activities.

Effect on Profitability

Initially, capital costs may not seem to have a significant impact on profitability. However, as the asset depreciates, each year's fraction of the cost is recorded as depreciation expense, which reduces net income and, thus, profitability.

Operating Costs Implications

Operating costs or OpEx, on the other hand, pertain to the day-to-day running costs of a business. These costs, like rent, salaries, utilities, and maintenance, are inevitable yet recurring. Unlike CapEx, operating expenses are fully tax-deductible in the year they are incurred.

Immediate Financial Impact

Operating costs have a direct impact on a company's bottom line. A company's operating income is determined by subtracting operating costs from gross profit. Therefore, a company with lower operating costs will often have higher profitability.

Cash Flow and Profitability

The cash flow is affected immediately by any changes in operating costs. If operating costs increase for any reason without a corresponding rise in income, cash flow will decrease. Similarly, profitability will be directly affected – higher operating costs will reduce profitability unless offset with increased revenues or decreased other expenses.

Thus, while both operating and capital costs play essential roles in a company's financial position, how accountants treat them and their effects on cash flow and profitability provide a clear distinction between the two.

Operating Costs and Budgeting

Knowledge of operating costs is an essential aspect when it comes to the creation of accurate budgets and financial forecasts. By understanding the expenses related to the day-to-day operations of the business, management can make informed budgetary decisions. This knowledge aids in a realistic representation of the company's financial future.

Role in Predicting Future Spending

Foreknowledge of operating expenses allows a business to anticipate future spending accurately. By analyzing historical data and trends, a company can project the likely cost of its operations going forward. This projection then forms a basis for budgeting and aids in the financial forecasting. This allows businesses to manage resources efficiently and strategic decision making.

For instance, if a company can predict a rise in a particular cost, such as energy, they can budget accordingly or look into more efficient alternatives to maintain profit margins.

Strategic Decision Making

Moreover, knowledge of operating costs informs strategic decision making. By understanding the cost implications of each decision, management can optimize operational efficiency, cut unnecessary costs, and allocate resources more effectively.

For example, suppose operating costs are high due to an underperforming sector in the business. In that case, the company may decide to discontinue that arm of the business or find ways to increase its efficiency. Similarly, if operating costs are low in a particular area indicating high profitability, the business might choose to invest more heavily in that sector.

In summary, a thorough understanding and effective management of operating costs can enable a business to plan and execute better financial management strategies. This, in turn, leads to better decision making, increased profitability, and reduced financial risk. Building this understanding is a crucial step towards long-term financial stability for any company.

Operating Cost Ratios

Operating cost ratios are financial tools used to measure the efficiency of a firm's expenditure. These ratios compare specific operating costs to company revenue, offering insight into how well the firm is managing its expenses, generating profits, and achieving efficiency.

One common type of operating cost ratio is the Operating Expense Ratio (OER). This ratio demonstrates the percentage of a company's revenues consumed by the operating expenses – the day-to-day costs of running a business, excluding cost of goods sold (COGS) and depreciation. This ratio is typically shown as a percentage, and a lower ratio is generally preferable, as it indicates the business is spending less to earn each dollar of revenue.

The formula for OER is as follows:

[ OER = \frac{Operating \ Cost}{Net \ Sales} \times 100 ]

Suppose a company has operating costs of $500,000 and net sales of $1,000,000. The OER would be 50%. In other words, the company is spending half of its revenue on operating expenses.

Firms typically aim to decrease their OER over time, as a lower ratio can point to managerial efficiency and effectiveness. However, what constitutes a 'good' or 'bad' ratio can vary greatly by industry, so it's advisable to compare a company's OER to others in the same sector.

Variable Expense Ratio

Another important type of operating cost ratio is the Variable Expense Ratio. This measures the relationship between a company's variable costs – expenses that change with the level of output – and its sales. This ratio helps firms understand how changes in the volume of operations will affect profitability.

These cost ratios offer valuable information about a company’s ability to control costs, drive growth, and maintain profitability. Savvy investors often scrutinize these ratios when considering potential investment opportunities. After all, a business that fails to keep its operating costs in check may struggle to turn a profit, which could adversely affect the return on investment.

Operating Costs and Sustainability

Moving onto the implications of operating costs on a company's sustainability, it is essential to realize that strategic management of these costs can not only improve a business’s financial position, but also contribute favorably towards the environment.

Impact of High Operating Costs

When operating costs run high, it tends to affect the sustainability of a business. High costs can squeeze profit margins and make a business less competitive in the long run. In extreme cases, it can threaten the company's survival in the market. Therefore, managing these costs effectively often equates to enhancing the business's sustainability.

Cost-Saving through Energy Efficiency

One of the approaches to manage operating costs involves optimizing energy usage within the organization. Energy costs form a significant portion of operating expenses for many businesses – from utilities like electricity, gas, and water to the fuel consumed for company vehicles and machinery.

By investing in energy-efficient technologies or remodeling business processes to reduce energy waste, a business can effectively bring down its operating costs. For example, replacing conventional equipment with energy-saving alternatives, implementing auto-shut programs in computers to save electricity, or using energy management systems can aid in maintaining the concern for sustainability while also reducing costs.

Reducing Waste for Cost-Efficiency

Similarly, focusing on waste reduction can also contribute to cost savings. Waste not only implies physical materials that a company might be disposing of but also refers to inefficiencies in business processes.

This could mean anything from excessive use of raw materials to inefficiencies in labor utilization. By eliminating these wastes, a business can significantly lower its operating costs. Incorporating lean methodologies or using just-in-time inventory management are a few examples of how companies can reduce waste.

While the above initiatives center around lowering operating costs, they also enhance a business's environmental sustainability – a critical aspect in today's world dominated by concerns for climate change. Therefore, by considering the implications of operating costs for sustainability, businesses can achieve a double win by saving money and contributing to a healthier planet.

Operational Cost Management Strategies

Cost control.

Cost control refers to the systematic efforts made by businesses to reduce their expenses. This can be done in various ways. Some companies choose to streamline their operations, eliminating redundancy and improving efficiency. For example, they may consolidate roles or departments, or invest in technology that automates certain processes.

Others may renegotiate with suppliers for lower prices, or seek alternatives that provide similar quality at a reduced cost. Cutting unnecessary expenses and finding ways to reduce the costs of essential operations are fundamental components of a successful cost control strategy.

Process Improvement

Process improvement involves identifying, analyzing, and enhancing existing business processes within an organization for optimization and to meet new quotas or standards of quality. This often involves a systematic approach which follows a specific methodology such as Lean or Six Sigma.

The aim is to minimize waste without sacrificing productivity. This might mean streamlining communication, minimizing delays, reducing errors, or automating tasks. While the implementation of process improvement can initially be costly or time-consuming, the long-term savings in increased efficiency and reduced waste can greatly outweigh the investment.

Strategic Outsourcing

Strategic outsourcing is another often-used operational cost management strategy. This involves delegating certain non-core tasks or functions of the business to external agencies or specialists. These functions could range from IT services, accounting, customer service, or manufacturing processes.

Outsourcing can save a company money by negating the need for investment in resources or staffing for these tasks. It also allows the business to focus its resources (including time and manpower) on its core competencies, thus potentially improving overall performance and profitability. However, businesses must be careful to maintain control and oversight of outsourced processes to ensure quality and efficacy.

Each of these strategies has its own advantages and potential pitfalls, and may not be suitable for every organization. Therefore, businesses should carefully evaluate which strategies align with their unique needs, goals, and capacity before implementing them.

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Operating Expenses

Step-by-Step Guide to Understanding Operating Expenses (OpEx)

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What are Operating Expenses?

Operating Expenses (OpEx) represent the indirect costs incurred by a business to continue running its day-to-day operations. While not directly tied to the revenue generated from the products/services, operating expenses are an essential part of a company’s core operations.

Table of Contents

How to Calculate Operating Expenses

What are examples of operating expenses, how to find operating expenses on income statement, how does opex impact ebit and operating margin, operating expenses calculator, 1. income statement assumptions, 2. operating expenses calculation example, 3. operating expenses forecast.

Operating expenses (OpEx) are associated with the core operations of a company but do not directly contribute to the production of the products or services sold.

Unique to operating expenses, most costs classified as OpEx are fixed costs , which means they are not directly linked to revenue .

Instead, operating expenses like SG&A remain relatively constant regardless of production volume.

For example, the rent expense for an office is stated on the contract with the building landlord and does not fluctuate based on revenue performance.

However, note that not all OpEx are fixed costs, as an item like office supplies can be viewed as more of a variable cost since more purchases would be made if production levels were higher.

The most common examples of operating expenses incurred by companies are listed here:

OpEx Examples

• Research & Development (R&D)
• Sales and Marketing (S&M)
• Selling, General and Administrative (SG&A)
• Payroll and Employee Wages
• Rent and Utilities
• Travel and Vehicle Expenses
• Office Supplies

On the income statement , the section for operating expenses can be found below gross profit and above operating income ( EBIT ).

Occasionally, OpEx can be consolidated into a single line item, but the standard layout is for the expenses to be broken out into multiple line items.

For example, Apple (AAPL) placed “Research & Development” and “Selling, General & Administrative” expenses into separate buckets.

The sum of the R&D and SG&A expenses equals the total operating expenses incurred by Apple (AAPL) for each year.

Apple Operating Expenses (Source: 2020 10-K )

Operating expenses are paid for using gross profits, which are the earnings once COGS has been subtracted.

By deducting operating expenses from gross profit, the operating profit (EBIT) can be calculated.

Since operating income considers operating costs (i.e. COGS and OpEx), it represents the cash flow from core operations before accounting for other non-core sources of income/expenses.

That said, management should strive to be more efficient and maintain reasonable levels of operating costs, especially because OpEx is a significant component of the break-even point of a company.

We’ll now move to a modeling exercise, which you can access by filling out the form below.

By submitting this form, you consent to receive email from Wall Street Prep and agree to our terms of use and privacy policy.

In our illustrative example, our company has the following financial data as of Year 0.

Income Statement Data (Year 0)

• Revenue = $125 million
• Cost of Goods Sold (COGS) = $60 million
• Selling, General & Administrative (SG&A) = $20 million
• Research & Development (R&D) = $10 million

Given the assumptions above, the Year 0 gross profit is equal to $65 million, and the operating income is $35 million.

• Gross Profit = $125m – $60m = $65m
• Operating Income (EBIT) = $65m – $20m – $10m = $35m

The $30 million in SG&A and R&D are the total operating expenses of our company.

Therefore, the gross margin is 52.0% while the operating margin is 28.0% in Year 0.

Next, we’ll project the income statement of our company down to the operating line.

Revenue will be assumed to grow at a year-over-year growth rate of 5.0% while the gross margin remains at 52.0%.

As for our two operating expenses, SG&A and R&D, the two will remain the same percentage of revenue as Year 0.

Since SG&A as a percentage of revenue was 16.0% and R&D was 8.0% of revenue in Year 0, we’ll extend this across our assumptions section.

For each period, we can project the OpEx value by multiplying the “% Revenue” assumption by the revenue amount in the matching period, as shown in the screenshot above.

• SG&A Expense = (SG&A % Revenue) × Revenue
• R&D Expense = (R&D % Revenue) × Revenue

In the final step, the operating income (EBIT) can be arrived at by deducting the projected SG&A and R&D from gross profit.

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How To Write the Operations Plan Section of the Business Plan

Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

Stage of Development Section

Production process section, the bottom line, frequently asked questions (faqs).

The operations plan is the section of your business plan that gives an overview of your workflow, supply chains, and similar aspects of your business. Any key details of how your business physically produces goods or services will be included in this section.

You need an operations plan to help others understand how you'll deliver on your promise to turn a profit. Keep reading to learn what to include in your operations plan.

Key Takeaways

• The operations plan section should include general operational details that help investors understand the physical details of your vision.
• Details in the operations plan include information about any physical plants, equipment, assets, and more.
• The operations plan can also serve as a checklist for startups; it includes a list of everything that must be done to start turning a profit.

In your business plan , the operations plan section describes the physical necessities of your business's operation, such as your physical location, facilities, and equipment. Depending on what kind of business you'll be operating, it may also include information about inventory requirements, suppliers, and a description of the manufacturing process.

Keeping focused on the bottom line will help you organize this part of the business plan.

Think of the operating plan as an outline of the capital and expense requirements your business will need to operate from day to day.

You need to do two things for the reader of your business plan in the operations section: show what you've done so far to get your business off the ground and demonstrate that you understand the manufacturing or delivery process of producing your product or service.

When you're writing this section of the operations plan, start by explaining what you've done to date to get the business operational, then follow up with an explanation of what still needs to be done. The following should be included:

Production Workflow

A high-level, step-by-step description of how your product or service will be made, identifying the problems that may occur in the production process. Follow this with a subsection titled "Risks," which outlines the potential problems that may interfere with the production process and what you're going to do to negate these risks. If any part of the production process can expose employees to hazards, describe how employees will be trained in dealing with safety issues. If hazardous materials will be used, describe how these will be safely stored, handled, and disposed.

Industry Association Memberships

Show your awareness of your industry's local, regional, or national standards and regulations by telling which industry organizations you are already a member of and which ones you plan to join. This is also an opportunity to outline what steps you've taken to comply with the laws and regulations that apply to your industry. 

Supply Chains

An explanation of who your suppliers are and their prices, terms, and conditions. Describe what alternative arrangements you have made or will make if these suppliers let you down.

Quality Control

An explanation of the quality control measures that you've set up or are going to establish. For example, if you intend to pursue some form of quality control certification such as ISO 9000, describe how you will accomplish this.

While you can think of the stage of the development part of the operations plan as an overview, the production process section lays out the details of your business's day-to-day operations. Remember, your goal for writing this business plan section is to demonstrate your understanding of your product or service's manufacturing or delivery process.

When writing this section, you can use the headings below as subheadings and then provide the details in paragraph format. Leave out any topic that does not apply to your particular business.

Do an outline of your business's day-to-day operations, including your hours of operation and the days the business will be open. If the business is seasonal, be sure to say so.

The Physical Plant

Describe the type, site, and location of premises for your business. If applicable, include drawings of the building, copies of lease agreements, and recent real estate appraisals. You need to show how much the land or buildings required for your business operations are worth and tell why they're important to your proposed business.

The same goes for equipment. Besides describing the equipment necessary and how much of it you need, you also need to include its worth and cost and explain any financing arrangements.

Make a list of your assets , such as land, buildings, inventory, furniture, equipment, and vehicles. Include legal descriptions and the worth of each asset.

Special Requirements

If your business has any special requirements, such as water or power needs, ventilation, drainage, etc., provide the details in your operating plan, as well as what you've done to secure the necessary permissions.

State where you're going to get the materials you need to produce your product or service and explain what terms you've negotiated with suppliers.

Explain how long it takes to produce a unit and when you'll be able to start producing your product or service. Include factors that may affect the time frame of production and describe how you'll deal with potential challenges such as rush orders.

Explain how you'll keep  track of inventory .

Feasibility

Describe any product testing, price testing, or prototype testing that you've done on your product or service.

Give details of product cost estimates.

Once you've worked through this business plan section, you'll not only have a detailed operations plan to show your readers, but you'll also have a convenient list of what needs to be done next to make your business a reality. Writing this document gives you a chance to crystalize your business ideas into a clear checklist that you can reference. As you check items off the list, use it to explain your vision to investors, partners, and others within your organization.

What is an operations plan?

An operations plan is one section of a company's business plan. This section conveys the physical requirements for your business's operations, including supply chains, workflow , and quality control processes.

What is the main difference between the operations plan and the financial plan?

The operations plan and financial plan tackle similar issues, in that they seek to explain how the business will turn a profit. The operations plan approaches this issue from a physical perspective, such as property, routes, and locations. The financial plan explains how revenue and expenses will ultimately lead to the business's success.

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Operating Cost: What is it, How to Monitor, Adjust & Calculate It?

Table of Contents

Introduction

Operating cost is a company’s expense to keep its operations running smoothly.

Operating costs are a monetary representation of what it takes to run a business. Wages, daily expenses, and various other costs are a part of it. These costs impact profitability, pricing, and a company’s growth strategy. 

This article will demystify operating costs and highlight why they’re more than just numbers on a spreadsheet. Dive in to grasp the heart of your business’s financial plan .

Read More: Variable Cost: Definition, Types, Formulas, Calculations and Examples

What are operating costs? 

Operating costs are the expenses businesses face daily. They cover everything a company needs to function, from employee salaries to rent. 

Think of them as the bills a business must pay to keep running. By managing these costs, a business can succeed. They differ from capital expenses and one-time purchases like machinery or real estate. 

These costs are pivotal in helping organizations make informed decisions to thrive. From a higher level view, it’s somewhat the backbone of an effective financial strategy. 

Read More: Prepaid Expenses: Definition, Importance, Types & Examples

Understanding operating costs in detail

Operating costs are the silent players in the backdrop, influencing profitability and sustainability. Every time a company pays for utilities, rents a space, or processes paychecks, it’s tapping into its operating costs. These aren’t one-off purchases; they recur month after month.

To effectively manage these expenses, one must categorize them. Some fixed costs, like rent, remain constant irrespective of the company’s output. Others vary with production, such as raw materials. These fluctuating costs can increase or decrease based on how much a company produces.

Then, there are tricky semi-variable costs. A good example is electricity. A factory might use a baseline amount for basic operations, but as production ramps up, more power is consumed. It’s a mix of fixed and variable.

Operating cost vs. operating expense

Simply put, operating expenses are one part of operating costs. Operating expenses refer to costs an organization generates that don’t relate to the production of its products. On the other hand, operating costs are every cost you incur to run your business or perform revenue-generating activities.

Operating costs provide a clearer picture of a business’s financial standing. Knowing which costs can be trimmed during lean times and which remain constant helps in budgeting and forecasting . And it’s not just about cutting costs; it’s about optimizing them.

Types of operating costs

When we talk about operating costs, it’s not a one-size-fits-all concept. Different types exist, and each has its unique characteristics. Let’s break them down.

• Fixed costs remain unchanged no matter how much a business produces. Think of monthly rent or salaries for permanent staff; they don’t fluctuate with production levels.
• Variable costs change based on production. If a company manufactures more products, the cost of raw materials, for example, will rise. When production decreases, so do these costs.
• Semi-variable costs stand in the middle. They contain elements of both fixed and variable costs. Consider an electricity bill at a factory. A base fee is always present, but the more machines you run, the higher the bill.
• Direct costs can be directly attributed to a specific product or service. If you make shoes, the leather and laces are direct costs.
• Indirect costs aren’t linked to a specific product. Office supplies, general utilities, and administrative salaries fall under this category. They support the overall business operations but can’t be pinned to one product.

Understanding these categories allows businesses to make smarter financial decisions. They can predict how costs will change with production shifts, leading to more accurate budgeting and planning.

Learn More About: Explicit Cost: Definition, Types, Calculations and Examples

Difference between operating costs and other types of business expenses

Read More: What is Prime Cost? Formulas, Calculations and Applications

Components of operating costs

Understanding the elements of operating costs makes companies aware of their financial health. They can optimize operations and boost profitability with a clear picture of where money flows.

• Salaries and wages : This is the money businesses pay to their employees. Whether hourly wages or monthly salaries, it’s a significant chunk of operating costs.
• Rent or lease payments : Many companies operate from rented spaces. This regular payment keeps the doors open for operation.
• Utilities : These include electricity, water, gas, and the internet. Like a household, businesses need these essentials to function smoothly.
• Raw materials and supplies : If you’re manufacturing a product, you need raw materials. For service industries, this could be office supplies or software subscriptions.
• Maintenance and repairs : Machines break, and spaces deteriorate. Keeping everything in working order is crucial.
• Marketing and advertising: Businesses invest in marketing campaigns, advertisements, and promotions to attract customers.
• Travel and transportation: This covers expenses related to business trips, vehicle maintenance, or delivery costs.
• Insurance : To safeguard against risks, businesses pay for various insurance policies, from property to liability.
• Taxes and licenses : Operating legally means paying taxes and securing necessary permits and licenses.
• Depreciation : While not a direct outlay of cash, accounting for the decrease in the value of assets is essential.
• Miscellaneous expenses: Every business faces unexpected costs. This category catches those unpredictable expenses that don’t neatly fit elsewhere.

Operating cost formula

The operating cost formula helps companies determine how much they spend to keep the wheels turning. At its core, the formula is straightforward.

Operating Cost = Cost of Goods Sold (COGS) + Operating Expenses

But, why is this formula crucial?  

It provides clarity. A business can see where its money goes and how expenses shift with production changes. With these insights, strategies can be tweaked, costs minimized, and profits maximized.

How to calculate operating costs?

Let’s unpack the operating cost formula.

Operating Cost = Cost of Goods Sold (COGS) + Operating Expenses.

Start with the cost of goods sold (COGS). It represents the total cost of producing the goods a business has sold. It includes material costs, direct labor, and other direct costs tied to production. For instance, if you’re making shirts, the fabric, buttons, and wages of the workers crafting those shirts contribute to the COGS.

Next, consider the operating expenses. These costs don’t directly tie into production but are essential to running the business. Think of them as the backdrop costs. Rent for the office space, salaries for administrative staff, marketing expenses, and utilities all fall here. They’re the backbone expenses that support a business in its daily operations.

Next, it is time for some simple math. Once you’ve identified and summed up your COGS and operating expenses, just add them. The result gives you the total operating cost.

For a clearer picture, imagine a bakery. The flour, sugar, and labor to bake the cakes and cookies from the COGS. The rent for the bakery space, the electricity bill, and the cashier’s salary represent the operating expenses. You’d add these two components together to get the total operating cost.

Quick Read: What are Business Expenses: A Complete Guide

Example of operating costs for digital businesses

Let’s look at the flip side. Software businesses may not have many physical costs, but they too have operating costs, as follows:

• Server costs: Hosting their website or app is a priority. They regularly pay for cloud services or data centers.
• Software licenses: Every software tool has a price tag, from project management platforms to graphic design tools.
• Employee benefits: Beyond just salaries, the startup offers health insurance, retirement contributions, and gym memberships.
• Digital marketing: To grow their user base, they invest in online ads, social media campaigns, and email marketing tools.
• Freelancers and consultants: A young startup might not have all the expertise in-house. So, they hire external professionals for specific projects.
• Co-working spaces: Initially, many startups opt for flexible co-working spaces over traditional offices to save costs and foster networking.
• Training and development: They fund courses and workshops to keep their team updated with the latest technology and industry practices.
• Transaction fees: If their app involves financial transactions, there are charges associated with payment gateways and bank services.
• Customer support tools: Engaging with users requires platforms for chat support, ticketing, and feedback collection.
• Research and development : Innovating means investing. The startup allocates funds to explore new technologies or improve their current services.

Importance of managing operating costs

Managing operating costs isn’t just a financial task; it’s pivotal to a business’s survival and growth. Here’s why it’s so crucial:

• Ensures profitability . Businesses can maximize profits when they reduce operating costs. It’s simple math: higher expenses eat into potential profit margins.
• Drives competitiveness. In a market teeming with rivals, cost-efficient operations can give businesses an edge. They can price products or services more competitively, luring in more customers.
• Prevents wastage. Regularly reviewing and managing costs brings wasteful expenditures to light. Be it excess inventory or an underutilized subscription, money saved is money earned.
• Fosters stability. Consistent monitoring of operating costs helps businesses weather financial storms. In lean times, a company that’s streamlined its costs stands a better chance at survival.
• Encourages growth. Reinvesting saved money into the business can drive expansion. Perhaps it’s opening a new branch, launching a product line, or entering a new market.
• Aids in decision-making. Businesses can make more informed strategic choices with a clear picture of their costs. It’s about knowing where to cut back and where to invest.

Quick Read: SG&A Selling, General and Administrative Expenses

Strategies for reducing operating costs

Reducing operating costs is an art that every successful business owner must master. Let’s explore some strategies to achieve this.

• Negotiate with suppliers. Building strong relationships with suppliers can lead to better deals. It’s a win-win: they retain a loyal customer, and you enjoy discounted rates.
• Embrace technology. Automation can replace manual tasks, speeding up processes and cutting labor costs. Software solutions can manage inventory, handle accounting, or streamline customer interactions more efficiently.
• Outsource when beneficial. Sometimes, outsourcing certain tasks is cheaper and more efficient than keeping them in-house. Think of customer support, content creation, or IT support.
• Review contracts regularly. Staying on top of contracts, like leases or service agreements, ensures you’re not overpaying. Look for renegotiation opportunities or consider switching providers.
• Implement energy-saving measures. Switch to LED lights, invest in energy-efficient appliances, or encourage remote work to reduce utility bills.
• Cross-train employees. When staff can handle multiple roles, it offers flexibility. It means during busy times or staff shortages, you won’t need to hire temporary help.
• Encourage remote work. Renting office space is expensive. By fostering a remote work culture, businesses can downsize physical offices and save on overheads.
• Bulk buy. Purchasing items in bulk usually comes at a discount. But it’s a balancing act – ensure you’re not overstocking perishable items.
• Regularly review expenses. Setting aside time each month to scrutinize expenses can highlight areas for potential savings. Sometimes, it’s the small, unnoticed costs that accumulate.

As the saying goes, “A penny saved is a penny earned.” These saved pennies can pave the way for a brighter financial future in the business world.

Quick Read: Incidental Expenses: What is it, Importance, Types and Examples

Technology’s role in managing operating costs

Embracing technology is about more than staying current. It’s a strategic move that can drastically cut operating costs, streamline processes, and offer better value to customers. For businesses eager to thrive in a modern marketplace, leveraging technology’s offerings is less of a choice and more of a necessity.

Technology can take over repetitive jobs. The software handles invoicing , data entry, and even customer communications, trimming labor costs. Advanced algorithms schedule staff or manage inventory more efficiently. It reduces idle time and ensures resources are used to their fullest.

Tools like video conferencing and project management software make remote work seamless. Businesses can save on office space, utilities, and commuting allowances. Moreover, data analytics tools provide insights into spending patterns. Companies can spot inefficiencies and address them promptly.

Below are some notable ways technology helps manage operating costs.

• Digital documents and signatures reduce the need for printing
• Technology-enabled supply chains track products from manufacture to delivery, reducing wastage and ensuring timely deliveries.
• Cloud storage and software-as-a-service (SaaS) models cut IT infrastructure and maintenance costs.
• Digital marketing tools analyze consumer behavior, helping businesses tailor their campaigns more effectively

Learn About: Selling Expenses: What is it, Types, Calculations, Examples & Tips

Monitoring and adjusting operating costs

Staying vigilant about operating costs isn’t a one-time effort. It’s an ongoing process of observation, analysis, and adjustment. By keeping their finger on the pulse, businesses ensure they’re always moving forward, making the most of every dollar spent.

Businesses should know their standard operating costs. Having clear benchmarks allows for easier tracking of any deviations. You can leverage accounting tools that can provide real-time insights. These tools flag unusual expenses or highlight patterns that might go unnoticed manually.

An in-depth review of finances, preferably monthly or quarterly, can unearth discrepancies. It’s a chance to delve deep and uncover hidden drains of resources. External factors like economic downturns or supply chain disruptions require swift adjustments. Proactively reducing costs in anticipation can prevent more significant financial setbacks.

As technology evolves, newer and more cost-effective solutions emerge. Staying updated on these developments helps organizations better monitor and adjust operating costs for more profitability.

What is the difference between operating costs and capital expenses?

Read More: Capital Expense (CapEx) vs. Operating Expense (OpEx)

Long-term vs. short-term operating costs

Remember, understanding both types of costs helps in effective financial planning. Adjusting one can sometimes offset the other. Balance is key.

Long-term operating costs

• These costs stretch over a long period.
• You can’t avoid them easily.
• Examples include building maintenance and long-term equipment leases.
• Planning for these is crucial.
• They provide insight into a business’s financial health over the years.

Short-term operating costs

• These costs come and go quickly.
• Paying them is often a monthly or quarterly obligation.
• Think about utility bills or short-term software subscriptions.
• Businesses need to manage them regularly.
• Short-term costs impact immediate cash flow.

Operating cost vs. non-operating cost

The difference between operating and non-operating costs is similar to what we discussed while comparing operating costs and other business expenses. Here’s a brief overview: 

Operating cost on income statements

On an income statement , operating costs hold a spotlight. Starting with revenues at the top, the income statement deducts operating costs to arrive at the operating profit.

First, let’s talk about revenues. They’re the earnings generated from selling goods or services. Once the direct costs of producing these goods or services, like raw materials and direct labor (often termed “ cost of goods sold ” or COGS), get subtracted, we reach a figure called “gross profit.”

Following this, operating expenses come into play. These are the expenses involved in the day-to-day running of a business. Examples include rent, utilities, salaries (excluding those involved in production), and marketing expenses. These costs are essential for a business to keep its doors open and serve its customers.

We determine the operating profit after subtracting operating expenses from the gross profit. This figure is significant. It represents the core profitability of a business from its primary activities, excluding external factors like interest or taxes.

Lastly, it’s worth noting that the income statement will also list non-operating expenses or incomes. These arise from events or decisions outside the core operations.

Limitations of operating costs

Below are some notable limitations of operating costs.

• Short-term focus. Operating costs mainly focus on immediate expenses, potentially overshadowing a business’s long-term financial health.
• Misleading analysis. Solely evaluating a company based on operating costs might provide a skewed picture. Sometimes, high expenses arise from critical, long-term investments.
• Seasonal variations. Operating costs can fluctuate based on the time of year, and using them without context might not offer an accurate annual performance snapshot.
• Inconsistencies across businesses . Only some companies classify operating costs similarly, complicating direct comparisons within an industry.
• Vulnerability to external factors . Elements like inflation or sudden market shifts can artificially inflate these costs, potentially causing undue alarm without a broader context.

Read More: Accounting Principles: A Comprehensive Guide 2023 – 2024

Best practices for managing operating costs

Although calculating operating costs differ for organizations, there are a few best practices you can follow to increase profitability and your business’ bottom line. 

• Monitor regularly. Keep a close eye on operating costs to identify unusual spikes or drops. Adjustments can be more effective when made proactively.
• Improve operational efficiency.   Implement lean management principles to optimize processes, eliminate waste, and use resources effectively.
• Invest in technology. Adopting modern tools and systems can automate tasks, reduce manual errors, and streamline operations, ultimately reducing costs.
• Train employees. Train staff to enhance their skills, ensuring efficient performance and reducing costly mistakes.
• Create feedback loops. Encourage feedback from employees at all levels. Frontline staff often have firsthand insights into where costs can be minimized without compromising quality.

Read More: Payroll Expense: A Comprehensive Guide for 2023

Bottom line

Operating costs illuminate the health of daily operations, painting a vivid picture of a company’s efficiency. It’s not just about the numbers but their story regarding sustainability, adaptability, and profitability. 

You can navigate challenges with agility and proficiency in managing operating costs. Cut down unnecessary expenses but ensure quality and growth don’t take a back seat while you’re at it. 

Operating costs in business are the expenses related to the day-to-day operations.

Operating costs directly affect a company’s profitability because higher costs decrease profit margins, whereas lower costs can enhance them.

Fixed operating costs can be reduced by renegotiating contracts, streamlining operations, or outsourcing services.

Variable operating costs change proportionately with business activity; as output or sales increase, these costs rise and vice versa.

Semi-variable operating costs contain fixed and variable components, changing in relation to business activity but not always at a constant rate.

Reducing operating costs can impact product quality or customer service if cuts compromise essential production or service delivery aspects.

Technology is pivotal in managing operating costs by automating processes, improving efficiency, and providing real-time data for better decision-making.

Businesses balance short-term cost-cutting with long-term growth by ensuring immediate savings don’t hinder future opportunities or damage brand reputation.

Operating costs should be monitored continuously and adjusted as necessary to respond to changes in the business environment and strategic goals. Monthly or quarterly review is a reasonable frequency.

Industries with high capital requirements, volatile raw material prices, or regulatory compliance demands, such as aviation, healthcare, and oil and gas, often find operating costs more challenging to control.

Operating costs directly impact a company’s financial health; high costs can erode profit margins, affecting liquidity and long-term viability, while well-managed costs can enhance profitability.

Energy-efficient practices can lower operating costs by reducing energy consumption, leading to savings on utility bills and potential tax incentives or rebates.

Cutting operating costs too aggressively can risk product quality, employee morale, and customer satisfaction and hamper future growth or innovation capacity.

Outsourcing certain services can help reduce operating costs by shifting labor, infrastructure, or other costs to third-party providers, often in locations with lower cost structures.

Companies like Southwest Airlines and Toyota have successfully managed their operating costs; Southwest kept its operations simple and standardized its fleet, while Toyota implemented the lean production system to increase efficiency and reduce waste.

Related Posts:

• Variable Cost: Definition, Types, Formulas,…
• What Is Cost Accounting? Types, Objectives, Methods…
• Financial Planning: What is it, Types, Objectives,…
• Explicit Cost: Definition, Types, Calculations and Examples
• Financial Analysis: What is it, Types, Objectives,…
• What is Prime Cost? Formulas, Calculations and Applications

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Operating expenses (opex): definition, formula, and example.

Operating expenses are necessary costs for conducting daily business activities. Understanding operating costs helps you manage your business finances and make the most of your tax-deductible expenditures. We’ll explore the definition of operating costs, how to calculate operating costs, and how to distinguish them from other common business expenses.

Key Takeaways  

• Operating expenses are ordinary and necessary costs incurred for running a business.
• Examples of operating costs include rent, utilities, insurance, and administrative wages.
• Fixed operating costs are costs that stay the same regardless of productivity.
• Variable operating costs change in relation to a business’s output.
• Most operating costs are tax-deductible in the year they are incurred.

Table of Contents

What Are Operating Expenses?

What is included in operating expenses, fixed costs and variable costs, how to calculate operating expenses, operating expenses formula.

• Operating Expenses Example

Managing Operating Expenses

Operating vs. non-operating expenses.

• CapEx vs. OpEx
• Importance of Operating Expenses

Optimizing Your Operating Expenses with FreshBooks

• Frequently Asked Questions

Operating expenses, or OpEx, are the costs incurred for normal business operations. This includes rent, utilities, marketing, administrative salaries, and other costs required for running the core operations of your business. Operating expenses are indirect costs, meaning they’re not directly associated with the production of your primary good or service.

Operating expenses include all the normal indirect costs of doing business. Common examples of operating costs are property-related costs like rent, utilities, maintenance, and building repairs, as well as administrative costs like salaries, insurance, licensing fees, marketing, and costs for research and development. 

Operating expenses vary depending upon the size and type of your business, but some common operating costs include:

• Payroll for staff (excluding labor for manufacturing)
• License fees
• Marketing (including for social channels like Facebook)
• Accounting fees
• Building maintenance and repairs
• Office supplies
• Attorney fees
• Property taxes on real estate
• Vehicle expenses
• Travel expenses

Operating expenses can be classified into two categories: fixed costs and variable costs. Fixed costs are recurring costs that stay the same regardless of business productivity. Rent, insurance payments, and administrative salaries are all examples of fixed operating costs.

Variable costs will change depending on your productivity and output. For example, if your company manufactures and sells an unusually large volume of product in one month, you’ll pay a greater amount to ship that product to your client. Things like transportation and fuel costs, seasonal labor, and raw materials are variable costs.

The first step in calculating operating expenses is to track and categorize all of your business expenses. Organize your expenses into operating and non-operating costs; you can also organize further by separating fixed and variable costs so you can easily track changes in your expenditures.

At the end of your accounting period, separate your operating expenses from other types of expenses. You’ll then use the formula described in the following section to calculate your operating expenses.

There are 2 common methods for calculating operating expenses: 

• Add up all operating expenses using the formula:

Operating Expenses = Rent + Utilities + Insurance + Administrative Costs + Etc.

• Subtract operating income and Cost of Goods Sold from total revenue using the formula:

Operating Expenses = Revenue – Operating Income – Cost of Goods Sold

Cost of Goods Sold refers to costs directly related to the production of your goods or service, including raw materials and labor costs.

Operating Expenses Example 

The above image from Harvard Business School Online shows an example of a company’s income statement for their financial year. 1 Harvard Business School Online.  How to Read and Understand an Income Statement . Accessed July 10, 2024. It breaks operating expenses into two categories: Selling and Operating Expenses and General and Administrative Expenses. Added together, these result in Total Operating Expenses of $854,159.

Operating expenses typically represent a significant portion of a company’s total expenses, so it’s important to manage them effectively. At the same time, reducing necessary operating expenses can impact your firm’s competitiveness. The following strategies can be helpful to reduce operating expenses while staying competitive in your industry:

• Expense Tracking: Being aware of all expenditures can help you eliminate excess spending before it becomes an issue.
• Research Your Options: Look for opportunities to save on your existing expenses. Consider whether other insurance providers offer coverage at a better price or whether you could save on office materials with a new supplier.
• Regularly Review Your Strategies : Are your current marketing tactics effective? Is your business paying for utilities that you don’t really use? Reviewing your expenses and strategies can help you ensure that you’re only paying for things that help you generate a profit.
• Engage Your Employees : Happy and motivated employees usually perform better, so consider engaging your team to provide ideas on how to make the most of everyday office expenses.

FreshBooks expense tracking software can help businesses efficiently track and categorize their operating expenses, such as rent, utilities, insurance, and travel expenses. This feature helps businesses stay on top of their operating expenses, monitor their cash flow, and identify areas where they can reduce costs. It can also automatically organize categories such as office expenses, travel expenses, and equipment expenses. Our expense tracking feature helps you save time and reduces the risk of errors.

A company’s operating expenses are costs required for everyday business operations, while non-operating expenses are other costs a business incurs that are not directly related to primary business operations. The most common examples of non-operating expenses are financial costs such as loan fees and interest charges. Losses from business investments, currency exchange, legal fees, and bank fees are also non-operating expenses.

It’s important to distinguish between operating and non-operating expenses when filing your business taxes. The Internal Revenue Service allows businesses to deduct most operating expenses that are necessary for business operations. Non-operating expenses are not usually tax deductible.

CapEx vs. OpEx 

Operating expenditures are the day-to-day costs of doing business, while capital expenditures are long-term investments that increase a business’s productivity and performance. Capital expenses, or CapEx, can include things like patents, machinery, and business real estate. 

Distinguishing between operating expenses and capital expenses is important for maintaining accurate accounting practices. The IRS treats OpEx and CapEx differently. It defines operating expenses as being ‘ordinary and necessary’, meaning they are commonly accepted in that industry and required for a company to conduct business. Most operating expenses are tax-deductible.

Capital expenses are recorded on a company’s balance sheet, but full recognition of the asset is usually spread across several years. This enables the business to recognize asset depreciation and spread out the cost. While capital expenses are usually dispersed across several years, operating expenses must be claimed in the year in which they are incurred. 2 IRS. Section 263 – Capital Expenditures . Accessed July 10, 2024.

Importance of Operating Expenses 

Operating expenses are important because they help assess a company’s costs, reduce operating costs, and stock management efficiency. Essentially, they highlight the level of cost a company needs to make to generate revenue, which is ultimately the main goal of any business. When a business doesn’t successfully track its operating expenses, it can end up losing money on spending oversights. Diligent accounting of operating expenses keeps profits on growth for continued success.

Operating expenses are all the normal costs of running a business and are divided into both fixed costs and variable costs. Most operating expenses are tax-deductible, so it’s important to track and categorize your operating expenses so you can make the most of your tax return.

FreshBooks expense tracking software makes it a breeze to track and organize all your operating expenses. Scan and categorize your receipts, integrate your invoices, and stay on track with your budget to make tax time a breeze. Try FreshBooks free to discover how the right accounting software can streamline your operating expenses tracking.

FAQs on Operating Expenses

Learn more about what’s included in operating costs and how operating costs affect gross profit along with frequently asked questions about operating costs.

Is income tax expense an operating expense? 

No, income tax expense is considered a non-operating expense and should not be included when calculating operating expenses for a business.

Is operating expense a liability or asset? 

Operating expenses are represented on a balance sheet as a liability. Because they are a financial expense that does not directly contribute to selling services or products, they aren’t considered assets.

How do operating costs affect profit? 

Operating expenses differ by industry and how a company decides to operate based on its business model. As a general rule, an increase in any type of operating costs lowers profit.

Are operating expenses included in COGS?

No, operating expenses and cost of goods sold are shown separately on a company’s income statement. This is because the cost of goods sold is directly related to the production of a product, as opposed to daily operations.

Are wages operating expenses?

Wages and salaries for administrative staff are categorized as operating expenses. Labor costs that are directly related to the production of a business’s primary goods or service are included in Cost of Goods Sold, which are not part of operating expenses.

What does an increase in operating expenses mean?

Higher operating expenses typically mean less profits for a business, since operating costs are deducted from revenue. However, more operating expenses are not always bad—if these costs are increasing in relation to your business’s core operations and productivity, they may simply be necessary to support your growing business.

Article Sources

• Harvard Business School Online.  How to Read and Understand an Income Statement . Accessed July 10, 2024. 
• IRS. Section 263 – Capital Expenditures . Accessed July 10, 2024.

Michelle Payne, CPA

About the author

Michelle Payne has 15 years of experience as a Certified Public Accountant with a strong background in audit, tax, and consulting services. Michelle earned a Bachelor’s of Science and Accounting from Minnesota State University and has provided accounting support across a variety of industries, including retail, manufacturing, higher education, and professional services. She has more than five years of experience working with non-profit organizations in a finance capacity. Keep up with Michelle’s CPA career — and ultramarathoning endeavors — on LinkedIn.

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Table of contents

Operating costs: what you need to know.

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Every business owner knows that operating costs are an inevitable part of running a company. From salaries to utilities, equipment to rent, the expenses can add up quickly and eat away at your profits. Understanding how to manage these costs is key to keeping your business afloat and thriving. Whether you’re a seasoned entrepreneur or just starting, there’s always more to learn about managing expenses and keeping your finances in order. 

What Are Operating Costs

Operating costs are the expenses that a business incurs to keep its operations running smoothly. Any expense that is necessary to keep the business up and running on a day-to-day basis is considered an operating cost.

Why Is It Important to Understand Operating Costs?

By being aware of the expenses associated with running a business, you can better plan your financial strategies and budget accordingly. Knowing operating costs also allows you to make informed decisions about investing in new technologies and services that can help improve your operations and bottom line. 

Understanding operating costs enables businesses to accurately price their products or services so they remain competitive in the market without losing profit margins. By having an accurate knowledge of operating costs, you’ll be able to better evaluate your company’s performance over time and identify areas where you may need to cut back or reallocate resources.

How to Calculate Operating Costs

First things first, identify all the expenses that fall under operating costs. This includes things like rent, utilities, wages, office supplies, equipment, and insurance – basically, anything that keeps your business up and running.

Next, decide on the timeframe you want to calculate your operating costs. Whether it’s a month, a quarter, or a year, make sure to stick to it so you can accurately compare expenses over time.

Now it’s time to add up all those expenses for your chosen timeframe. You can do this the old-fashioned way with a pen and paper, a spreadsheet, or use accounting software if you prefer.

Finally, divide your total operating costs for the period by the number of units of output or services provided during that same period. This will give you the operating cost per unit.

Reviewing your operating costs regularly can help you identify areas where you can cut back or make improvements, so don’t forget to check in from time to time.

Two Components of Operating Costs

Operating costs consist of two main components: fixed costs and variable costs.

Fixed Costs

Fixed costs are costs that remain constant regardless of the level of output or sales. Examples include rent, insurance, loan payments, depreciation and amortization, taxes, and interest on the debt. Fixed costs do not change with an increase or decrease in the number of goods or services produced.

Variable Costs

Variable costs are those that fluctuate depending on the activity level of a business. Examples include raw materials, direct labor, packaging supplies, fuel and utilities used within production processes, subcontractors, and other outside services used for specific projects. Variable costs tend to increase as production increases but will decrease as production decreases. For example, when producing more units of a product there is an increased need for raw materials to create them while fewer units require fewer raw materials.

Types of Operating Costs

There are a variety of expenses a business incurs to keep the lights on and the doors open on a day-to-day basis. Common operating costs include:

• Utility Bills: Electricity, water, gas, trash collection
• Office Supplies: Paper, ink, toner, stationery, cleaning supplies
• Technology and Equipment: Computers, laptops, tablets, phones, printers
• Office Rentals and Lease Payments: Desk space leases, office or warehouse rentals 
• Insurance Expenses: Liability insurance for employees and property protection
• Legal and Accounting Fees : Tax preparation services and legal counsel fees 
• Marketing/ Advertising Costs: Web design services and campaigns 
• Transportation Expenses: Fuel costs for delivery vehicles and travel expenses for business trips
• Employee Wages and Benefits: Salary payments and health insurance coverage
• Business Licensing and Permit Fees: Relevant permits to operate the business

Operating Expenses vs Capital Expenses

Capital Expenses (CAPEX) are the expenses a business incurs to acquire, improve, or maintain its long-term assets, such as buildings, equipment, and vehicles. These expenses are typically larger than operating expenses and are incurred less frequently. Unlike operating expenses, capital expenses are not deductible in full in the year they are incurred; instead, they are depreciated over time and deducted in portions over the useful life of the asset.

The main difference between operating expenses and capital expenses is the type of expense and how they are treated for tax purposes. Operating expenses are deducted in full in the year they are incurred, while capital expenses are depreciated over time. Businesses need to differentiate between the two types of expenses and properly classify them in their financial records to accurately track their profitability and tax liability.

Operating Costs vs Overhead Costs

Operating costs and overhead costs are two distinct concepts in business and finance, with different meanings and implications for a company’s financial health. 

Operating costs refer to the expenses associated with running a business on an ongoing basis, such as personnel expenses, raw materials, utilities, rent/lease payments, insurance premiums, etc. 

Overhead costs, on the other hand, are those financial commitments that keep a business operational but may not be directly related to the core sales or production processes. Examples of overhead costs include office space maintenance and repair, legal or accounting fees, marketing expenses (website design and advertising), software licenses, and upgrades. 

Operating Expenses vs Non-Operating Costs

Non-operating costs are expenses that aren’t directly related to the core operations of the business. These costs are often one-time or infrequent and may not contribute to generating revenue. Examples of non-operating costs include:

• Interest expenses on loans or debt
• Losses on the sale of assets
• Taxes on non-operating income
• Penalties or fines
• Donations or charitable contributions
• Legal settlements or judgments

Operating expenses are necessary to keep the business running and generate revenue, while non-operating costs are not directly related to the core operations of the business and may not contribute to revenue generation.

Operating Costs vs SG&A

SG&A stands for Selling, General and Administrative expenses. It’s associated with activities necessary to run a business including marketing, customer service, legal fees, and research and development. 

Operating costs directly affect the production of goods or services while SG&A is related to the activities required to run a company such as administration. For example, if a company needs to create a new product line, it would incur both operating costs related to producing the product itself as well as R&D (research and development) costs classified under SG&A. If they were hiring additional staff members, that would be classified as an operating cost since it’s directly related to production. 

Keeping Your Operating Costs in Check

Operating costs are a necessary part of any business, but managing them doesn’t have to be a headache-inducing task. By keeping a watchful eye on your expenses and using the right tools, you can keep your finances in check and maintain a healthy bottom line.

If you’re tired of dealing with spreadsheets and paperwork, doola’s bookkeeping can take the hassle out of financial management and make it easy to track your operating expenses. 

How do you categorize operating expenses?

Operating expenses can be categorized into a few broad categories, including fixed costs and variable costs. Fixed costs are those that do not change with the level of production or output, such as rent and mortgage payments, insurance premiums, and administrative salaries. Variable costs are those that vary with the level of production or output, such as materials used in production and labor expenses.

What are the two main types of operating expenses?

The two main types of operating expenses are fixed costs and variable costs. Fixed costs remain constant regardless of how much is produced or achieved; they include rent, mortgage payments, insurance premiums, administrative salaries, and other overhead costs. Variable costs fluctuate according to how much is produced or achieved; these include materials used in production, repair & maintenance costs, and labor expenses. 

 Is salary an operating expense?

Yes, salary is an example of an operating expense as it would generally fall under the fixed cost category for many businesses. 

What is not an example of an operating cost?

An example of a cost that would not be considered an operating cost is capital expenditure; this includes items such as equipment purchases or investments in real estate property which are necessary for the business to operate but are not directly related to the day-to-day operations themselves.

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Examples of Operational Costs

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The purpose of analytical business reports, the difference of net sales & cost of goods sold.

• Introduction to Corporate Strategy
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Operation cost, often referred to as operating cost, is the money that it takes to run your business. These are the day-to-day business expenses required to keep the lights on and to have the staff necessary to sell and fulfill customer needs. Operating costs are often reflected on the income statement, which is recorded for a company each year; the income statement reviews broad financial indicators such as overall revenues, the costs of goods sold, the operating costs and net profits. When establishing the financial books for your company, understanding what's considered an operating cost versus other costs helps properly account for costs. This makes it easier to create annual statements and accounting records, when determining the financial health of the business.

What Is the Operating Cost?

Saying that the operating cost consists of the funds required to perform day-to-day operations doesn't fully differentiate these costs from other business expenses. When thinking about operating costs, think about what it takes to keep the lights on in the office or warehouse. These types of costs include lease and rent payments, utility costs, office supplies, employee wages and bank charges, at the very least. There may also be accounting fees or legal fees included in these numbers, as well as entertainment costs, travel expenses, and sales and marketing costs. Businesses should have these expenses categorized in bookkeeping systems, so that they can easily run reports and financial statements.

Operating costs also include the costs of buying or making your products and services. These are often called the cost of goods sold (COGS). These are the costs that are subtracted from total revenues to generate the gross revenue numbers. Operating expenses are then subtracted from this, with taxes and interest on loans to determine the net profit of the company. It may seem like operating costs and operating expenses should mean the same thing, but they don't. The operating expenses refer to the specific costs after gross revenue is defined in the income statement. These include the rent, sales and marketing costs, administrative costs, payroll and office expenses. Simply put, expenses are part of overall costs. Costs include expenses, plus COGS. Failing to understand this distinction could lead to misreading reports and not having a true picture of your company's financial health.

The operating costs consist of a mixture of fixed and variable costs. Fixed costs are costs that don't change regularly, whereas variable costs do. Fixed costs include lease payments, while variable costs include payroll, utilities and even raw materials. Don't assume that all operating costs are one or the other. If a company wants to scale production to higher levels, it would need more raw materials, more manpower and pay more in utilities, but the main business location still operates on the same lease.

Calculating operating expense uses a simple formula:

Operating Cost = COGS + Operating Expenses

A business should know its required operating costs to ensure that it is pricing products or services properly to generate enough revenue to pay all expenses. A business leader needs to consider the annual business sales cycle and to consider the annualized numbers, as well as the smaller quarterly and monthly operating costs, to break down production consistently over the year, without overloading the company during busier periods. For example, a toy company that knows that it will sell more during the holiday season can choose to produce in one of two ways: sell a fixed number of units monthly for the entire year or reduce the crew, until the company wants to ramp up production closer to the peak season. Understanding total annual operating expenses in relation to revenue helps a business owner better create a strategy that works for his business.

Operating Cost vs. Startup Cost

By looking at what the operating costs are, it might seem like these are all of the expenses. For some business models, this is true. For other business models, there are other costs that must be considered. The startup model considers the operating costs, plus any startup costs. Startup costs include the money required to obtain a lease, buy or make a down payment on equipment, computers and supplies. Startup costs also include location build outs and buying furniture. These are not normal operating costs, but they must be factored into what a new company needs to obtain in financing in order to properly launch the business.

If a startup only sought a Small Business Loan (SBA) for operating expenses, the SBA advisor would certainly question why there are no startup expenses listed. It could be that the business owner funded the startup himself, which is a positive thing, but the startup expenses still need to be accounted for in any business plan, and in any financial statement seeking funding for a new business. If the business is only seeking startup capital, similar questions arise.

The SBA office or the venture capitalist will want to know how quickly the company will be operational and generating revenues. Ideally, the company can start self-funding operational costs quickly, but without those numbers considered and accounted for, investors might be hesitant to fund even the best of company ideas. Business leaders of startup companies need to show lenders and investors the exact need, and the plan to fund that need for at least three to five years. No one wants to put money into a project to only hope that it makes money; they want to see exactly how sales and marketing will generate the required revenues to take the company from investor reliant to self-reliant financially.

">Operating Expenses vs. Capital Expenses

Similar to a startup expense, capital expense costs are not part of normal operating costs. Additionally, startup costs can be considered a capital expense, but there are other expenses that fall into this line item for existing companies. The distinction is important to understand. As already discussed, the operating expense is the funding required for everyday business operations. The capital expense is funding that is used to create a future benefit; it is a growth into the long-term development of the company.

Capital expenses are treated differently for business taxes purposes, because they usually involve investment in a long-term asset such as land or software development. Even though there are costs associated with capital expenses, they are listed as assets on the balance sheet, whereas all operating expenses are treated as expenses on the income statement. Most assets are allowed to be depreciated on taxes over time, helping the company offset future revenues resulting from the growth, while capturing the total value of the asset over time.

A business that is starting out might need two years of operating expenses as well as the capital investment to start the company. An existing business past the need for startup costs might seek capital investment for growth, or use retained earnings for capital expenses used in expansion and long-term growth strategies. An existing business seeking capital investment should not need that money for operating expenses. The business should be able to demonstrate consistent revenue generation to pay for operating expenses and be turning a profit, even if it is a small one.

Example of Business Operational Costs

We have already listed many examples of operational costs found in daily business practices. Let's examine how this works in the average small business. A talented pottery maker wants to open a storefront with a workshop and storage area in the back of the shop. Startup costs are the first consideration. The lease is $2,000 per month, which includes utilities requiring two months down or $4,000. He also needs displays, shelves, a basic sales stand with a computer and point of sale software. All furniture costs total $6,000, and the computer hardware and software is $1,000. He also needs signage for the store, which costs $1,000, and updated pottery equipment costs $2,000. His startup costs are: $14,000 ($4,000 + $6,000 + 1,000 + $1,000 + $2,000).

Now, consider his operating costs, starting with the cost to make his pottery. He needs clay, paint and other expendables used in making each piece of art. In order to make 100 new pieces per month, he estimates that he needs approximately $2,000 in supplies. This is a variable cost, and since each piece is customized, there will be spoilage, and he may use more supplies for custom orders. He estimates he will sell a minimum of 80 pieces per month, averaging $100 per piece or $8,000 in total revenues.

His COGS is $2,000, which is subtracted from his total revenues to give us his gross profit of $6,000 ($8,000 - $2,000 = $6,000). From this, he has to pay operating expenses of $2,000 in monthly rent, $500 in marketing, $1,000 for his one employee, $100 on the loan for his startup and another $500 for taxes, office supplies and a business phone line. His total operating expenses are $4,100 ($2,000 + $500 + $1,000 + $100 + $500). When he subtracts these, he has his net profit of $1,900. This is before he has distributed his profit to himself or has invested in the growth of his business.

His operating cost is the COGS, plus the operating expenses. Thus, his monthly operating cost is $6,100. Multiply this by 12 to get the annual operating cost of $73,200. His annual total revenues are $96,000, leaving the business owner with $22,800 in net profits. Considering that he hasn't paid himself yet, his earnings is distributed from this number.

Strategic Planning for Companies

The small business owner should consider the costs spent on getting to gross profit, the COGS, as well as operating expenses, so that he could look for ways to improve net profits. Many business owners might put themselves on payroll for a small amount and take a distribution at the end of the year, with other profits. If there aren't a lot of profits, this means that the business owner is earning only a small salary from the company.

Consider our pottery store owner. If he wanted to get new displays three years into the business to modernize the store, he wouldn't have a lot of money to do so. He wasn't taking a salary in the example, so he was only earning a maximum of $1,900 per month in the example. He would need to determine how to reduce his COGS or his operating expenses, so that he could increase his profit. Conversely, he would need to determine how to scale his operation up, so that he could sell more products, while keeping costs down.

Perhaps the business owner could buy some supplies in bulk, paying less and storing what he could without worrying about spoilage. He could also do a price analysis in the market to determine which products sell best, and then he could raise the prices. The business owner could also look at peak selling seasons to make sure he not only has the shelves stocked with products but also that he has promotions to entice as many sales as possible. He might need to ramp up some months from 50 pieces to 70 pieces, so that he would have enough stock for peak season sales, when he can maximize revenues. These are some strategies that business leaders can consider to generate more profit, without incurring more expenses.

• SBA: Calculate your startup costs
• Investopedia: The Difference Between an Operating Expense and Capital Expense
• Accounting Tools: Examples of operating expenses
• Investopedia: Operating Cost

With more than 15 years of small business ownership including owning a State Farm agency in Southern California, Kimberlee understands the needs of business owners first hand. When not writing, Kimberlee enjoys chasing waterfalls with her son in Hawaii.

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• How to Write a Great Business Plan: Operations

The eighth in a comprehensive series to help you craft the perfect business plan for your startup.

The next step in creating your business plan is to develop an Operations Plan that will serve your customers, keep your operating costs in line, and ensure profitability. Your ops plan should detail strategies for managing, staffing, manufacturing, fulfillment, inventory... all the stuff involved in operating your business on a day-to-day basis.

Fortunately, most entrepreneurs have a better handle on their operations plan than on any other aspect of their business. After all, while it may not seem natural to analyze your market or your competition, most budding entrepreneurs tend to spend a lot of time thinking about how they will run their businesses.

Your goal is to answer the following key questions:

• What facilities, equipment, and supplies do you need?
• What is your organizational structure? Who is responsible for which aspects of the business?
• Is research and development required, either during start-up or as an ongoing operation? If so, how will you accomplish this task?
• What are your initial staffing needs? When and how will you add staff?
• Who will you establish business relationships with vendors and suppliers? How will those relationships impact your day-to-day operations?
• How will your operations change as the company grows? What steps will you take to cut costs if the company initially does not perform up to expectations?

Operations plans should be highly specific to your industry, your market sector, and your customers. Instead of providing an example like I've done with other sections, use the following to determine the key areas your plan should address:

Location and Facility Management

In terms of location, describe:

• Zoning requirements
• The type of building you need
• The space you need
• Power and utility requirements
• Access: Customers, suppliers, shipping, etc.
• Specialized construction or renovations
• Interior and exterior remodeling and preparation

Daily Operations

• Production methods
• Service methods
• Inventory control
• Sales and customer service
• Receiving and Delivery
• Maintenance, cleaning, and re-stocking
• Licenses and permits
• Environmental or health regulations
• Patents, trademarks, and copyrights

Personnel Requirements

• Typical staffing
• Breakdown of skills required
• Recruiting and retention
• Policies and procedures
• Pay structures
• Anticipated inventory levels
• Turnover rate
• Seasonal fluctuations in demand
• Major suppliers
• Back-up suppliers and contingency plans
• Credit and payment policies

Sound like a lot? It can be--but not all of the above needs to be in your business plan.

You should think through and create a detailed plan for each category, but you won't need to share the results with the people who read your business plan

Working through each issue and developing concrete operations plans helps you in two major ways:

• If you don't plan to seek financing or outside capital, you can still take advantage of creating a comprehensive plan that addresses all of your operational needs.
• If you do seek financing or outside capital, you may not include all the detail in your business plan--but you will have answers to any operations questions at your fingertips.

Think of Operations as the "implementation" section of your business plan. What do you need to do? How will you get it done? Then create an overview of that plan to make sure your milestones and timeline make sense.

That way the operations section answers the "How?" question.

Next time we'll look at another major component in a business plan: who is (or will be) on your Management Team .

More in this series:

• How to Write a Great Business Plan: Key Concepts
• How to Write a Great Business Plan: the Executive Summary
• How to Write a Great Business Plan: Overview and Objectives
• How to Write a Great Business Plan: Products and Services
• How to Write a Great Business Plan: Market Opportunities
• How to Write a Great Business Plan: Sales and Marketing
• How to Write a Great Business Plan: Competitive Analysis
• How to Write a Great Business Plan: Management Team
• How to Write a Great Business Plan: Financial Analysis

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How to Write an Operations Plan Section of your Business Plan

Free Operations Plan Template

• June 26, 2024

An operational plan bridges the gap between high ambitions and actual achievements. This essential integral section helps businesses thrive, achieve their goals, and handle challenges with accuracy and purpose.

But is it challenging for you to write one in a manner that shows a clear picture of your business operations? Drafting the operations plan section can be tricky due to the uncertainties of the business environment and the risks associated with it.

Well, worry not you’re at the right place! Here, we will see how to write an engaging operational plan in a business plan with an example. So let’s get going.

What is an operations plan?

An operations plan of a business plan is an in-depth description of your daily business activities centered on achieving the goals and objectives described in the previous sections of the plan. It outlines various departments’ processes, activities, responsibilities, and execution time frame.

The operations section explains in detail the role of a team or department in the collective accomplishment of your goals. In other words, it’s a strategic allocation of physical, financial, and human resources toward reaching milestones within a specific timeframe.

Key questions your operational plan should address

A successful operational plan section of your business plan should be able to answer the following questions:

• Who is responsible for a specific task or department?
• What are the tasks that need to be completed?
• Where will these operations take place?
• When should the tasks be completed? What are the deadlines?
• How will the tasks be performed? Is there a standard procedure?
• How much is it going to cost to complete these tasks?

Let’s see how to write the operations section that answers all the above questions:

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How do you write an operations plan section?

Writing an operations plan within a business plan involves summarizing the day-to-day tasks necessary to run the business efficiently and meet its goals in both the development and manufacturing phases of the business.

Here’s a step-by-step guide:

1. Development phase

In this stage, you mention what you’ve done to get your business operations up and running. Explain what you aim to change and improvise in the process. These are the elements your development section will contain:

Production workflow

Explain all the steps involved in creating your product. Provide a detailed description of each step, including any inefficiencies and the actions needed to address them. Here, you also mention any inefficiencies that exist and talk about the actions that need to be taken to tackle them.

Write down the risks involved in the production and potential problems you may face later down the line. State the safety measures employees take to avoid any misfortune while working. Explain how you store hazardous material and discard waste.

Mention any industry organizations and associations you’re a part of or plan to join. It’s essential to include this information to convey to the reader that you’re aware of the organizations and associations in your industry.

Supply chains

Here, you mention the vendors you work with to sell your products. Give a quick rundown of the agreements you signed with them. Mention the terms and conditions, prices, and timeframe of the contract. You can also mention if you have any backup suppliers if the existing ones fail to fulfill the requirements.

Quality control

Describe the measures you’re taking to assure and verify the quality of the end product. If you’re working towards getting a product certification, explain the steps you take to meet the set standards.

2. Manufacturing phase

The development stage acquaints the reader with the functioning of your business, while the manufacturing stage describes the day-to-day operation. This includes the following elements:

Outline of daily activities

Create an outline of the day-to-day activities of the production process. This includes the hours of operation, days the business will be open, and whether the business is seasonal or not.

Mention the location of your business , other branches you have, and their locations. If available, include images or drawings of the buildings, lease documents, real estate agreements, and other relevant documents. If you include these in your plan, mention why they’re crucial.

Tools and equipment

Describe the tools and machinery you use. You should also include the cost of the equipment; these will be important to predict financial requirements.

List down all your assets. These include land, buildings, tools, machinery, vehicles, and furniture. Include a legal description and the value of these assets.

Special requirements

If you require any additional facilities like water supply or power requirements, you mention them here. Specify what you need to do or have already done to acquire permissions for these requirements.

Raw materials

Mention your raw material suppliers. If you need any extra materials, you can also include them in your operations plan. Here, you also mention the contracts and agreements with your suppliers.

Productions

Explain the production process and the time required to produce one unit. Include the factors that may disrupt the production flow. Further, mention your strategies to tackle these inefficiencies to avoid delays in manufacturing.

Here, you state the process of storing manufactured products, managing the stock, and the costs of the storage spaces. Stringent management of inventory is essential to maintain product quality and assure customer satisfaction.

Feasibility

To ensure the viability and effectiveness of your product, detail any tests it has undergone. This includes prototype testing to evaluate the design and functionality.

Additionally, highlight product or service testing, such as performance, safety, and user experience assessments. These tests validate your product’s readiness for the market, ensuring it meets customers’ needs and regulatory standards.

Include the pricing strategy for your products or services. You can also include the final prices of your products.

Outline your pricing strategy including which approach you used, for example—cost-plus, value-based, or competitive pricing. Include the final prices of your products or services, providing a breakdown if there are different tiers or packages.

Why do you need an operations plan?

An operations plan is like an instruction manual for your business. It helps investors assess your credibility and understand the structure of your operations.

Internally, an operations plan works as a guide, which helps your employees and managers to know their responsibilities. It also helps them understand how to execute their tasks in the desired manner—all while keeping account of deadlines.

The operations plan helps identify and cut the variances between planned & actual performance and makes necessary changes.

It helps you visualize how your operations affect revenue and gives you an idea of when you need to implement new strategies to maximize profits. Some of the advantages of preparing an operations plan include:

Offers clarity

Operational planning makes sure that everyone in the audience and team is aware of the daily, weekly, and monthly work. It improves concentration and productivity.

Contains a roadmap

Operational planning makes it much easier to reach long-term objectives. When members have a clear business strategy to follow—productivity rises, and accountability is maintained.

Set a benchmark

It sets a clear goal for everyone about what is the destination of the company and how to reach it.

Manages resources

It supports you in allocating resources, such as human resources, equipment, and materials, ensuring that nothing is wasted and everything is used optimally.

Helps in decision making

An operations plan helps make smart decisions by showing how the business runs day-to-day. It provides details on resources, wise investments, and effective risk management, ensuring that decisions improve overall business operations.

Operations plan essentials

Now that you have understood the importance of the operations plan, let’s go through the essentials of an operations plan:

Strategic plan

Your operations plan is fundamentally a medium for implementing your strategic plan . Hence, it’s crucial to have a solid plan to write an effective operations plan.

Having clear goals is one of the most important things for an operations plan. For clear goals, you need to think SMART:

• Specific: Clearly define what employees should achieve
• Measurable: Quantify the goal to track progress
• Attainable: Set ambitious but achievable goals
• Timely: Provide a deadline

Different departments will have their objectives, all supporting the main goal. All these strategic objectives are flexible and should align with the company’s long-term goals.

Key performance indicators

It’s essential to choose the right Key Performance Indicators (KPIs). It’s a good practice to involve all your teams while you decide your KPIs. Some of the important KPIs can be revenue growth, customer acquisition cost (CAC), net profit margin, churn rate, etc.

Creating a timeline with milestones is necessary for any business. It keeps everyone focused and helps track efficiency. If some milestones aren’t met in a certain period, then it’s time to re-evaluate them.

Examples of some milestones are:

• Hiring key team members in six months
• Setting checkpoints for different production phases like design, prototype, development, testing, etc.
• Acquiring the first 50 clients in a year

Now you’re all set to write an operations plan section for your business plan. To give you a headstart, we have created an operations plan example.

Operations Plan Example

We know this guide has been helpful for you in drafting a comprehensive operational plan section for your business plan.

If you’re still unsure or need help getting started, consider using business plan software like Upmetrics . It offers step-by-step guidance, so you won’t have to worry about what comes next.

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Frequently Asked Questions

What is the difference between a strategic plan and an operational plan.

A strategic plan outlines the long-term vision, mission, and goals of an organization, focusing on growth and direction over several years.

In contrast, an operational plan details the short-term tasks, processes, and resource allocation needed to achieve those strategic goals, emphasizing day-to-day efficiency and productivity.

What role does the operations plan play in securing funding for a business?

The operations plan defines the clear goals of your business and what actions will be taken daily to reach them. So, investors need to know where your business stands and it will prove the viability of the goals helping you in getting funded.

What are the factors affecting the operations plan?

Some of the factors that affect the operations plan are:

• The mission of the company
• Goals to be achieved
• Finance and resources your company will need

Can an operations plan be created for both start-up and established businesses?

Yes, both a startup and a small business need an operations plan to get a better idea of the roadmap they want for their business.

About the Author

Upmetrics Team

Upmetrics is the #1 business planning software that helps entrepreneurs and business owners create investment-ready business plans using AI. We regularly share business planning insights on our blog. Check out the Upmetrics blog for such interesting reads. Read more

Reach Your Goals with Accurate Planning

An Ultimate Guide for Better Operations

• Operates towards success
• Describe business milestones
• Plan such as financials, budget planning 
• Turn your goals into an actionable plan

Cut Costs, Not Corners: The Art of Managing Operational Expenditures

Operational Expenditures (OEs) are the costs associated with running business processes, and they encompass everything from day-to-day operations like rent and utilities to one-time investments in equipment and information technology. Businesses need to understand these expenditures, as they can have a significant impact on the bottom line.

OEs are an important, yet often overlooked, part of running any business operation. Not only can these costs contribute to revenue leakage, but they can also be a huge drain on various resources, if not properly managed. Understanding and controlling these expenses is essential for business to remain efficient and cost-effective. In this article, we will look at what OEs are, how to manage them effectively with strategies and budgeting tools, and how to develop a plan for reducing overall these expenditures. With this knowledge in hand, companies can make sure that their operations are running as smoothly as possible.

Defining Operational Expenditure: What Counts as an OE?

As stated earlier, these are expenses incurred by a business through its operations. These expense include, but are not limited to:

Labor- Expenses associated with your labor force including salaries, benefits, and even PTO.

Overhead expenses- Think of everything from rent to office supplies.

Materials- The raw materials that go into making your product.

Transportation and shipping fees- All of the costs associated with getting your product into your customer’s hands, such as packaging materials and delivery.

There are two main types of OEs, which are fixed and variable costs.

A fixed cost is an expense that doesn’t fluxuate often, if at all, regardless of the level of product output. An example of this would be rent for your office or factory space.

A variable cost fluctuates based on your level of product sales and output. A great example of this would be the automotive industry. The more vehicles they produce, the more their costs in materials will increase.

The size of a business’s operational Expenditure include what’s listed below and many others:

Size of Operations- How much space or people do you need to maintain your business operations

Type of Business- A software company and a automotive manufacturer would have wildly different operational expenses to manage.

Industry- Some industries have inherently different costs of materials, such as the difference between a toy maker and a computer manufacturing company, like Dell.

Geographical Location- The top three things in business operations, much like real estate is location, location, location. Some geographic locations will have higher costs associated.

Cost Structure- This refers to the proportion fixed versus variable cost. This allows business to see what financial buckets their revenue is going towards.

Larger companies tend to have higher operating expenses due to their need for more resources such as personnel, equipment, and facilities while smaller companies may have fewer resources but still incur some overhead expenses such as advertising or taxes which can add up quickly over time if not managed properly. In short, companies of all sizes need to have strong strategies in place to ensure business operations are trim while also upholding final product standards.

Several types of FAVR programs can be customized to fit different business needs. For example, businesses can choose between flat rate or personal rate plans which allow them to set a single rate per mile for all employees or individual rates based on actual monthly mileage or on each employee’s driving habits. Additionally, there are plans designed specifically for different types of vehicles such as cars versus trucks or vans versus SUVs.

Implementing an effective FAVR program not only ensures that employees receive adequate mileage reimbursement payments but also provides potential financial benefits to businesses. By calculating fixed and variable costs accurately and setting up a standard mileage reimbursement program system for the mobile workforce that works best for them, businesses can save money on taxes, lower administrative costs associated with tracking mileage expenses manually, increase employee satisfaction with flexible payment options, and reduce fraudulent activity with secure payment systems.

Understanding the basics of FAVR car allowances and how they contribute to optimal financial benefits for both employers and employees allows businesses to create an effective reimbursement system tailored to their specific expense needs.

Top Strategies for Effectively Managing Operational Costs

Now that there’s an understanding of OEs, the next six points are strategies companies of all sizes can use to improve control of their OEs. The points below will help focus business leaders to take a deep look at how various aspects of the business operate and introduce creative ways to bring operational expenses down.

Unlock Savings: How to Analyze Your Current Spending Trends

The first step in managing operational costs is understanding where you currently spend your money. Analyzing current spending trends can help you identify areas where there may be room for improvement, allowing you to target those areas and make changes that will reduce expenses. This includes understanding the cost per unit of production, identifying areas where overspending is occurring, and spotting any unnecessary costs or business processes that could be eliminated or streamlined.

Embrace the Future: Cutting Operational Costs with Automation

Integrating automation into business operations is an effective strategy to manage and reduce operational costs. Technological advancements provide a multitude of opportunities to streamline processes and improve efficiency, thereby contributing to cost savings.

Automated systems can take over repetitive tasks, reducing manual labor costs, minimizing errors, and saving valuable time. From automated customer service chatbots to financial management software, the automated workflow options are vast and varied.

For instance, inventory management software can optimize stock levels, eliminating excessive storage costs and reducing the risk of stockouts. Similarly, an automated invoicing system can streamline the accounts receivable process , leading to quicker payments and improved cash flow.

Automation tools provide accurate, real-time data, allowing businesses to make informed decisions faster. They aid organizations in identifying operational inefficiencies and monitoring the effect of cost-cutting measures, providing key insights for strategic planning.

Investment in automation may require a significant initial cost , but the long-term cost savings, increased efficiency, and potential revenue growth it offers often offset the upfront expense. It’s crucial to remember that while automation can bring considerable benefits, it should be implemented thoughtfully, complementing human talent, not replacing it.

By harnessing automation, businesses can remain agile, efficient, and cost-effective in an increasingly competitive market. This adaptability helps businesses navigate the intricacies of OEs, ensuring operations stay lean and effective.

Navigating the challenges of OEs can be a daunting task for businesses. One of the best ways to ensure cost efficiency and reduce expenses is to develop strategies for managing operational costs. Here are some methods that businesses can use to control these costs, improve their business process efficiency and create cost-effective operations.

Optimize to Minimize: Maximize Savings Using Existing Resources

One effective approach to managing operational costs involves more efficient processes and optimizing the use of resources that are already in place. This strategy helps businesses save without making substantial changes or cutting back on staff or services.

Start by scrutinizing current contracts with vendors. There might be room for negotiation to secure better terms, or there could be alternative suppliers who provide superior value for money. By re-evaluating vendor relationships, you might uncover significant potential savings.

Additionally, establish a robust internal system to monitor expenses. Detailed tracking of expenditure can shed light on unexpected cost-saving opportunities, helping your business run more efficiently. It’s not just about cutting costs, but about making your current resources work smarter.

Remember, the key is to strive for cost-efficiency without sacrificing the quality of your products or services. In many cases, this can be achieved by looking inward and optimizing what you already have.

Slash Your Expenses: Implementing Cost-Cutting Measures for Success

In the drive towards leaner, more profitable operations, it’s crucial for businesses to proactively identify and implement measures that can help decrease their expenses. This could encompass a range of strategies, from renegotiating contracts to considering energy-efficient technologies and practices.

To begin with, businesses could evaluate their existing contracts and engage in renegotiation discussions with vendors to secure more favorable terms. If a vendor is inflexible, don’t hesitate to explore alternatives. A change in suppliers could result in more competitive pricing, better quality, or both.

Secondly, making a conscious effort to adopt greener, more energy-efficient technologies can also prove beneficial. For instance, transitioning to LED lighting or considering other forms of renewable energy can significantly reduce utility expenses over time.

Lastly, an internal expense monitoring system could be instrumental in identifying potential areas of savings. A robust tracking system ensures transparency in where the money is going but also aids in identifying areas of unnecessary expenditure that can be trimmed.

By proactively pursuing these measures, businesses can stay one step ahead, enhancing their overall profitability while still delivering excellent services or products to their customers.

Teamwork Makes the Dream Work: Engaging Your Team in Cost-Reduction Strategies”

In your quest to further business goals and minimize operational costs, don’t overlook the potential within your team. Encourage all team members, from the C-suite to entry-level employees, to brainstorm creative solutions that could result in cost savings.

This could involve finding ways to enhance the efficiency of existing processes, or it could mean inventing new, cost-effective solutions to ongoing challenges. By fostering a culture of innovation, you can ensure everyone actively contributes to improved efficiency, increased productivity, and lower operational costs.

Expect the Unexpected: Planning for Unforeseen Business Expenses

Regardless of the size of the business or organization, it’s crucial to have a plan in place for unforeseen expenses that may unexpectedly arise. This involves assessing the potential budgetary impacts, devising strategies to lessen the blow, and creating contingency plans in case of revenue deficits.

Being proactive and preparing for unexpected costs allows businesses to respond swiftly and efficiently when these situations occur. With a well-thought-out plan, operations can continue to be cost-effective and productive, irrespective of any sudden changes or challenges. Having a prepared approach cushion the impact of these expenses and helps maintain operational continuity and financial stability.

Understanding and effectively managing Operational Expenditures (OEs) is the cornerstone of any successful business. Given their pervasive and substantial impact on a business’s bottom line, all aspects of OEs warrant careful scrutiny, planning, and strategic action.

The journey to effective OE management starts with a thorough understanding of the current spending patterns and trends. Once the business has this understanding, the next logical step is to identify areas where costs can be controlled and reduced. Harnessing the power of technology and automation offers a promising way to manage and curtail OEs. It can increase efficiency, reduce errors, and provide crucial real-time data, all of which contributes to improved decision making and cost-effectiveness.

Moreover, maximizing the utility of existing resources and adopting cost-cutting measures play a pivotal role in managing OEs. Renegotiating vendor contracts, adopting green technologies, and setting up an internal expense monitoring system are all effective strategies to enhance cost efficiency.

Involving the entire team in these cost-saving measures fosters an innovation-driven culture where everyone contributes to the bottom line. The collective intelligence of the team can unearth creative and novel solutions that can have a significant impact on the operational costs.

Finally, anticipating and planning for unexpected expenses can help businesses remain resilient in the face of sudden financial challenges. Having contingency plans in place can help businesses adapt and respond quickly, ensuring continuous operation and financial stability.

In summary, effectively managing Operational Expenditures is a complex, multifaceted challenge that requires strategic planning, technological adaptation, team involvement, and a proactive approach towards unexpected expenses. By taking these steps, businesses can ensure that their supply chain and operations run smoothly, efficiently, and remain cost-effective, thereby solidifying their financial standing and boosting their overall competitiveness in the marketplace. Remember, the key to profitability is not just about generating revenue, but also about controlling expenses. And in the world of business, every penny saved is a penny earned.

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Headquartered in Pittsburgh, PA, USA with offices on three continents and clients all over the globe, ExpenseAnywhere is a world–class provider of exceptionally powerful, easy–to–use, web–based solutions for travel and expense management, supplier invoice processing, and p-card / prepaid card management.

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What is an Operational Plan? A Complete Playbook (+ Examples, Tips & More)

Without a plan, your business operations are as good as a children’s playground—everyone’s doing their own thing with no care in the world. 

An operational plan brings order to your organization. It defines the functional aspects of your long-term strategy, like goals, milestones, responsibilities and timelines, to build collaboration and make real progress toward your vision. 

Teams often overlook the importance of operational plan management, leading to miscommunication, unnecessary roadblocks and slow growth. 

If you don't want to end up in a chaotic playground with everything going south, read this start-to-finish guide on operational planning. We'll share a 6-step process of making your own operational plan with a few examples to inspire you.

TL;DR: What is an operational plan?

• An operational plan clarifies the details of your strategy, assigns responsibilities, and sets milestones and timelines.
• Use an operational plan to create a roadmap, assign roles, track progress, establish criteria for success, and minimize errors.
• To develop an operational plan, create a fail-proof strategic plan, establish clear goals and budgets, define the project scope, create the operational plan, get stakeholders' buy-in, and publish the plan using the right tool.

What is an operational plan?

An operational plan is a roadmap designed to implement your business strategies. It operationalizes your strategic plan by defining:

• Vision and objectives behind a strategy.
• Budget and resources required for execution.
• Weekly, monthly and quarterly milestones. 
• Relevant metrics to track progress consistently. 

‎An operational plan clarifies all the finer details about your strategy—like what, who, when and how—to help you realize the bigger vision. It’s a work plan for transferring the available inputs into the desired outputs. 

Operational planning vs. strategic planning

While operational and strategic planning might sound the same, they have significantly different meanings. Let's take a quick look at these differences to understand what an operational plan stacks up against a strategic plan.

5 reasons why you need an operational plan

Only setting goals without a solid operational plan to implement them is like making new year’s resolutions that never come true. 

Without a clear direction of what to do and how, you’d end up wasting your resources with little to no progress to show for it. An operational plan helps move the needle for your company by clarifying the steps to success and bringing more accountability. 

Still wondering how an operational plan can keep you on track? These five benefits will clue you in:

1. Creating an airtight roadmap

If a strategic plan defines the destination, an operational plan chalks out the itinerary to reach that destination. This actionable roadmap covers all bases to streamline collaboration within the team and set up the right systems to hit your milestones. 

2. Attributing roles to all stakeholders

Making an operational plan allows you to assign responsibilities to all internal and external stakeholders. It clarifies who’s responsible for what and sets expectations from the start. This is key for bringing everyone on the same page and avoiding roadblocks once the work is underway. 

3. Tracking progress & making strategic changes

Timelines and milestones are two of the most crucial components of an operational plan in business. They empower teams to analyze their performance and review progress objectively. You can use these insights to tweak your game plan for greater success and to improve operational efficiency .

4. Establishing criteria & metrics for success 

An operational plan outlines the parameters for success and metrics to monitor the same. These metrics give you a clear picture of your progress at every stage to ensure you’re moving as per the plan. They also highlight any potential red flags that can potentially derail the plan and need your attention. 

5. Minimizing discrepancies & errors

One of the most important benefits of making an operational plan is the clarity it brings to everyone. Instead of leaving your team clueless about the next steps, this work plan clarifies how and where they can start. It also reduces errors by laying down the ground rules for every task and process.

📌 ‎ Related resource: Operations Teams: How to Assemble and Lead a High-Performing Team

How to develop an operational plan strategy

There’s no standard rulebook for creating an operational plan. It’s a fully customizable document that depends entirely on your company’s goals, resources, timelines and overall approach. 

For example, a fast-paced team can work with shorter timelines and hit more goals than a large-scale organization with more levels of checks and a bigger hierarchy.  

So, instead of replicating other companies’ operational plans, let’s help you create your own plan with this 6-step process:

• Draw out a fail-proof strategic plan.
• Establish clear goals and budgets.
• Dig deeper into the project scope.
• Create your operational plan.
• Get all stakeholders’ buy-in for the plan.
• Publish the plan using the right tool.

1. Draw out a fail-proof strategic plan

A strategic plan is to an operational plan what a storyline is to a movie—it conveys the essence and creates a direction for the operational plan to become a masterpiece. 

So, naturally, the first step to operational planning is creating a strategic plan; here’s how:

• Define what success looks like for the entire organization. 
• Evaluate organizational readiness to implement this strategy. 
• Take inputs from people in the senior leadership. 
• Assign responsibilities to different stakeholders. 
• Prioritize goals against timelines. 

Once done, you can rely on this strategic plan throughout the operational planning process to prepare for what lies ahead. 

💡 ‎Use these 14 free customizable project plan templates to enhance communication, save time and achieve your strategic planning goals.

2. Establish clear goals & budgets

The next step is breaking your high-level goals into shorter, more actionable objectives. For example, you can divide the goal of achieving an X% growth in revenue into smaller targets, like increasing inbound leads, doubling down on cold outreach and rolling out a referral program. Implementing effective referral tracking within the program will allow you to monitor and optimize the success of your referral initiatives, providing valuable insights into the sources and impact of referred business.

Goal-setting makes your operational plan realistic and feasible. You're ideating the means to realize the long-term vision by hitting the right milestones. 

More importantly, once you have a list of goals, it's easier to determine the budget and resources required to achieve them. Before moving ahead, do your homework to set a solid budget that allows you to implement your strategy without splurging too much. 

3. Dig deeper into the project scope

Once you’re clear about your goals and resources, it’s time to define the finer details of your plan—specifying who’ll do what, when and how. 

Create a comprehensive project scope by outlining:

• Department-wise goals and tasks according to the goals.
• Different stakeholders involved within and outside your company. 
• Responsibilities for each stakeholder with primary KPIs for their role.
• SOPs  and  workflows  to perform a task or complete a process. 

This step brings more specificity to your operational plan. It concretely spells out each goal with details about milestones within each goal, roles and teams responsible for fulfilling these milestones and how they will work toward the end goals. 

💡 ‎ Scribe top tip: Creating a project scope document is a breeze when you use Scribe. You can use Scribe's project scope template to get cracking at the earliest. 

4. Create your operational plan

By this point, you've done all the legwork to get to work and start writing your operational plan finally.

Make it as actionable and value-packed as possible by answering these five main questions:

• Who: People involved in different tasks. Include a list of teams and specific roles involved in the business operations and clarify what’s expected of them. 
• What: Plan of action and targets to pursue. Create a milestone-based roadmap of the high-level goals to achieve and the smaller goals involved in the process. 
• Where: Platform(s) where daily operations will happen. Add all the tools and frameworks you'll use to run business operations through this plan seamlessly. 
• When: Deadlines for different tasks and activities. Map out the timelines for each job to ensure your team is on track for timely completion. 
• ‍ How much: Costs involved in hitting the designated goals. Mention your final budget and resource allocation for different tasks.

Use Scribe's free AI Writer for Operations tool to capture and document operational procedures.

‎Additionally, a good operational plan also lists the metrics to track your progress. Pick and explain relevant metrics in your plan to show employees how you'll analyze their efforts.  ‍

5. Get all stakeholders’ buy-in for the plan

No plan is perfect and there's always scope for improving your operational plan to make it perfect. So, once you've drafted the plan, don't forget to run it by a few select stakeholders to identify the gaps you can cover. 

Actively seek feedback from people in different ranks and departments to understand the missing links in your plan. Your plan will go through 2-3 rounds of iterations before it’s finally ready to roll out. 

6. Publish the plan using the right tool

The final step in the process is publishing the plan. The most important thing to remember is that your plan should be:

• Reader-friendly.
• Easily accessible.
• Quickly shareable. 

Clueless about the best way to hit all three points to roll out your operational plan? We have just the solution you need — Scribe . 

‎Scribe is a documentation tool designed to create intuitive documents, like an operational plan, in a few seconds. It significantly reduces the time spent on creating such documents and improves team efficiency in more ways than one.

‎You can create a single Scribe to explain a process or compile instructions with SOPs in a single place with Pages. You can even ask the AI to write your operational plan — just add a simple prompt and your Scribes, and the AI will build a customized document!

‎It's the easiest way to bring your team on the same page and power up your operations! 

✨ ‎See how operations teams use Scribe to tackle even the most daunting operational challenges.

3 operational plan examples (& why they work)

If you’re looking for some inspiration to get cracking with your planning process, looking at a few operations plan examples can help big time! Let’s look at three great examples, see why they work and how you can replicate the results. 

1. Carter Supply’s risk management plan

This detailed risk management plan by Carter Supply covers several aspects of managing risk at the organization. This 10-page document lists the key components of this plan, like a summary, the approval process and the end-to-end risk management process. 

As an operational plan, it gives the entire team clear insights into the risk management plan, highlights why it’s in place and explains how this plan will be used. 

This plan also covers different aspects of the plan and lays down the process of working on each element. For example, for risk quantification, the plan specifies that the risk manager will work with the risk owner to understand the exposure. 

2. Upscope’s go-to-market plan

Upscope ’s go-to-market (GTM) plan is another excellent example of operational planning. The SaaS company created this plan to execute its strategy for breaking into the co-browsing market. 

Pursuing this goal, the team created an airtight plan with a rundown of its target audience, pain points the product solves and the buyer journey. 

The Upscope marketing and sales teams could use this GTM plan to launch targeted campaigns and reach the right people. They were also well aware of the main value propositions to share with the target buyers, nudging them towards a purchase. 

📌 ‎Related resource: How Product Operations Can Help Your Team Build Better Products 📌 ‎

3. SmartNet’s project quality management plan

The quality management plan by SmartNet is a detailed document explaining the company’s entire operations framework, from the management structure to project reporting, risk assessment, deliverable production and more. 

Instead of a single department, this operational plan documents the complete business operations. Despite being so lengthy, the document is easy to read and understand—exactly how the plan should look like.

It also includes all the critical information to guide new employees about the company's operations from scratch.

Make operational planning your road to success 

When done right, operational planning can be a game-changer for streamlining your operations. It’s an in-depth roadmap to work toward your vision and hit all goals. 

Even though making an operational plan isn’t the most exciting task and it can get extremely time-consuming, the right process and tools can do the trick for you. Follow the six steps we’ve highlighted in this guide and when you’re ready to roll, use Scribe to put the plan in place. 

Scribe takes the pain out of documentation to empower teams for seamless operational planning. Try it today to see how it works!

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Mastering Operations Strategy: Key Elements for Success

What is Operations Strategy?

Definition of operations strategy.

An operations strategy is a comprehensive plan that outlines the actions and decisions needed to manage and optimize the production and delivery of goods and services. It’s a roadmap designed to align day-to-day operations with long-term business goals, ensuring all activities contribute to overall organizational success. This type of strategy is crucial for establishing the methods and frameworks through which an organization achieves its objectives efficiently.

Importance of Operations Strategy

The significance of effective operations strategy cannot be overstated. By aligning operations strategy with broader business aims, companies can enhance their competitive positioning, realize cost efficiencies, and ensure smoother execution of business activities. Without a well-defined operations strategy, it becomes challenging to scale operations, enhance customer satisfaction, or achieve long-term sustainability. Explore business diagrams for strategic planning .

Aligning Operations Strategy with Business Goals: Ensures coherence and unified direction across all departments.

Enhancing Competitive Advantage: Through optimized processes and resource allocation, companies can outperform competitors.

Operational Efficiency: Streamlines processes to reduce waste and manage costs effectively.

For those interested in operational action planning, Learn more about Operational Planning .

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Examples of Operations Strategies

An operations strategy is a long-term plan that outlines how an organization will utilize its resources to support business objectives, deliver value to customers, and gain a competitive edge. Here are some examples of operations strategies across different industries:

1. Cost Leadership Strategy

Example: A manufacturing company might focus on reducing production costs through economies of scale, lean manufacturing techniques, and efficient supply chain management. Companies like Walmart and IKEA leverage cost leadership by focusing on high efficiency, large-scale production, and cost-saving measures to offer low prices to consumers.

2. Quality Improvement Strategy

Example: A luxury car manufacturer, such as BMW or Mercedes-Benz, might focus on superior quality as a core element of its operations strategy. This can involve implementing rigorous quality control processes, investing in advanced manufacturing technologies, and sourcing high-quality materials to maintain a premium brand image.

3. Customer Service Strategy

Example: A company like Ritz-Carlton focuses on delivering exceptional customer service as part of its operations strategy. By empowering employees to provide personalized service and resolving issues on the spot, the company creates a loyal customer base and enhances its brand reputation.

4. Sustainability Strategy

Example: A company like Patagonia emphasizes sustainability in its operations strategy. This might include using environmentally friendly materials, reducing waste in manufacturing processes, and encouraging recycling among customers to align with its brand values and attract environmentally conscious consumers.

5. Technology Integration Strategy

Example: A company like Tesla incorporates advanced technology into its operations strategy by investing in automation, AI, and robotics to streamline production processes, enhance product quality, and improve efficiency in its Gigafactories.

These strategies are often tailored to fit the specific goals and challenges of the organization and are designed to align with the overall business strategy.

5 Key Elements of an Operations Strategy

A successful operations strategy is comprised of several key components:

Resources: Including human, mechanical, and locational. It’s vital to assess both current capabilities and potential acquisitions.

Technology: Encompassing advanced tools beyond basic software, such as production automation and machine learning.

Products/Services: Analyzing the lifecycle of your offerings and adapting to market trends will optimize efficiency.

Facilities: Ensuring production facilities and inventory management systems meet operational goals and safety standards.

Production System: Essential for effective resource planning and quality control, influencing long-term operational efficiency.

Why is a Successful Operational Strategy Important?

Aligning with business goals.

An effective operational strategy is pivotal in ensuring that an organization’s daily activities are aligned with its overarching business goals. By synchronizing operational plans with strategic objectives, companies can streamline their processes and improve overall efficiency. This alignment helps in setting clear priorities and ensures that all departments work towards common targets, ultimately leading to cohesive and coordinated business efforts.

Gaining Competitive Advantage

A well-crafted operational strategy enhances a company’s competitive advantage by optimizing resource utilization and improving customer satisfaction. For instance, tailoring production processes to meet unique customer needs not only boosts brand loyalty but also positions the business favorably in the market. Competitive priorities such as speed, quality, and flexibility become achievable, thus providing a significant edge over competitors. Read more on a winning customer experience strategy.

Improving Operational Efficiency

An operational strategy is crucial for enhancing operational efficiency. It allows businesses to identify and eliminate bottlenecks, optimize workflows, and reduce operational costs. Utilizing tools like action plans can further clarify roles and responsibilities, making the execution of operational tasks more structured and effective.

Companies leveraging platforms like Creately, can achieve greater transparency and collaboration, resulting in improved productivity and streamlined operations.

Components of an Effective Operations Strategy

No matter which type of initiative you choose to prioritize in your company, you’ll need to consider several key components for an effective operations strategy:

Capacity Planning:

Accurately assessing your current resources and anticipating future needs is crucial for long-term success. A thorough understanding of your business’s capabilities helps identify what is necessary to sustain or expand operations.

Human Resources Management:

Effective HR planning covers everything from attracting new talent to retaining existing employees. Prioritizing your workforce can reduce turnover, stabilize operations, and preserve valuable institutional knowledge.

Quality Management:

Implementing quality management practices ensures that product development meets desired standards. In a professional service firm, this might involve focusing on client feedback to enhance collaboration and outcomes.

Supply Chain Management:

In manufacturing, supply chain management is vital. Streamlining the flow of goods from suppliers helps reduce costs, support growth, and ensure high levels of customer service.

Technology and Innovation:

Embracing digital transformation and cutting-edge technologies is essential for boosting business efficiency. Regardless of the industry, tools like AI, automation, and cloud computing can greatly enhance operational capabilities and inform better decision-making.

5 Core Types of Operational Strategies

Understanding the different types of operational strategies is crucial for optimizing your business operations. Here, we explore the various approaches and provide operational strategy examples to illustrate their application.

1. Cost-Based Strategy

A cost-based strategy focuses primarily on minimizing expenses to deliver competitive pricing. It involves optimizing the supply chain, automating workflows, and carefully managing resources to maintain low costs without compromising quality. This strategy is particularly beneficial for businesses competing on price.

Focus: Minimizing costs to offer competitive pricing.

Approach: This strategy emphasizes cost efficiency through optimized supply chains, bulk purchasing, automation, and lean production techniques. Companies aim to reduce operational expenses without compromising product quality.

Example: Walmart is known for its cost-based strategy, using its scale and efficient logistics to offer low prices.

2. Quality-Based Strategy

Quality-based strategies prioritize delivering high-quality products or services. This approach aims to enhance customer satisfaction, boost brand reputation, and reduce return rates. Companies implementing this strategy often invest in rigorous quality control processes and continuous improvement initiatives.

Focus: Delivering superior quality products or services.

Approach: Companies that adopt a quality-based strategy prioritize high standards in production and service delivery. They invest in quality control measures, continuous improvement processes, and premium materials to enhance customer satisfaction and brand reputation.

Example: Mercedes-Benz focuses on quality-based strategies by producing high-end vehicles with precision engineering and premium materials.

3. Flexibility Strategy

Flexibility strategies are designed to allow businesses to adapt quickly to market changes and customer demands. This strategy involves developing flexible systems and processes that can accommodate varying production volumes or personalized customer requests. Flexibility also fosters innovation and rapid product development.

Focus: Adapting quickly to market changes and customer demands.

Approach: Flexibility strategies involve developing adaptable systems that can respond to varying production volumes, customized orders, or changing market conditions. This strategy often includes diversification, flexible manufacturing systems, and scalable operations.

Example: Amazon’s ability to scale operations during peak times like holidays reflects its flexibility strategy, ensuring timely deliveries and meeting fluctuating demand.

4. Speed-Based Strategy

In today’s fast-paced business environment, speed is often a critical factor in gaining a competitive edge. A speed-based strategy focuses on minimizing the time required to produce and deliver products or services to customers. By implementing techniques such as just-in-time (JIT) manufacturing, lean operations, and process streamlining, companies can significantly reduce lead times and enhance their ability to meet customer expectations swiftly. This strategy is particularly vital in industries where timely delivery is crucial, such as logistics and e-commerce.

Focus: Reducing lead times and accelerating delivery.

Approach: Speed-based strategies focus on reducing the time it takes to produce and deliver products or services. Techniques like just-in-time (JIT) manufacturing, lean operations, and streamlined processes are used to increase efficiency and meet customer expectations for quick service.

Example: Companies like FedEx and UPS utilize speed-based strategies to ensure fast and reliable delivery services.

5. Dependability Strategy

Reliability is the foundation of trust between a company and its customers. A dependability strategy is centered on ensuring that products and services are consistently delivered as promised, maintaining high levels of operational reliability. By focusing on robust supply chain management, consistent production processes, and unwavering service quality, companies can build strong customer loyalty and a solid reputation for dependability. This strategy is essential for businesses where consistency and reliability are key to customer satisfaction and long-term success.

Focus: Ensuring consistent and reliable operations.

Approach: A dependability strategy centers on maintaining high levels of reliability in delivering products or services. This involves robust supply chain management, consistent production processes, and reliable service delivery, which build customer trust and loyalty.

Example: Toyota is known for its dependability strategy, focusing on consistent quality and reliable production processes through its well-established Toyota Production System (TPS).

6. Innovation Strategy

In a rapidly evolving market, innovation is the engine that drives growth and differentiation. An innovation strategy emphasizes the continuous development of new products, services, and business processes to stay ahead of the competition. By investing in research and development (R&D), fostering a culture of creativity, and embracing new technologies, companies can introduce groundbreaking offerings that capture market share and set industry trends. This strategy is crucial for businesses aiming to lead in dynamic sectors where staying innovative is the key to sustained success.

Focus: Driving growth through innovation in products, services, or processes.

Approach: Innovation strategies prioritize the development of new products, services, or ways of doing business. Companies invest in research and development (R&D), encourage creativity, and seek out new technologies to stay ahead of competitors.

Example: Apple’s focus on innovation in product design and technology has kept it at the forefront of the tech industry.

7. Service-Based Strategy

Exceptional customer service can be a powerful differentiator in a competitive market. A service-based strategy focuses on delivering outstanding customer experiences as a core component of the business’s value proposition. Companies adopting this approach invest in comprehensive training, advanced customer relationship management (CRM) systems, and continuous service innovation to exceed customer expectations. This strategy is vital for businesses looking to build strong, lasting relationships with their customers, where service excellence is the hallmark of their brand.

Focus: Providing exceptional customer service to differentiate from competitors.

Approach: Companies adopting a service-based strategy emphasize customer service excellence as a key differentiator. They invest in training, customer relationship management (CRM) systems, and service innovation to create a superior customer experience.

Example: Companies like Ritz-Carlton and Zappos are renowned for their exceptional customer service, which is a core part of their operational strategy.

Adopting the right operational strategy can significantly impact your business’s efficiency and competitive stance in the market. By understanding and implementing a suitable strategy, you can better manage costs, maintain high-quality standards, and swiftly adapt to changes, thereby positioning your business for success.

Creating an Operational Plan

Setting goals and objectives.

Creating a robust operational plan starts with clearly defining your goals and objectives. Understanding what you aim to achieve helps structure your approach and ensures alignment with overarching business strategies. Begin by analyzing your company’s market position, current operational capabilities, and the competitive landscape. Utilizing tools like a SWOT analysis generator aids in pinpointing strengths, weaknesses, opportunities, and threats, helping to set realistic and impactful goals.

Budget and Indicators

Once goals are established, the next step is to allocate a corresponding budget. An effective operational plan must include financial planning to fund different activities, whether for marketing, production, or human resources. Incorporating leading indicators is equally crucial, as they provide early signals for potential issues and help in proactively managing operations. Indicators like sales growth, customer satisfaction scores, and production efficiency metrics offer actionable insights for monitoring and adjusting strategies.

Communication and Documentation

A successful operational plan hinges on efficient communication and thorough documentation. It’s essential to communicate the plan’s objectives, strategies, and key performance metrics to team members and stakeholders to ensure everyone is on the same page. Keeping detailed documentation of processes, decisions, and progress aids in maintaining transparency and accountability.

Technology and Tools

Leveraging technology not only enhances the operations planning process but also streamlines execution. Integrated visual collaboration tools like Creately provide an interactive platform that enables users to visualize and manage operational plans effectively. Advanced tools such as Market Research, Competitive Analysis, and cascading OKR Structures can be used to help align day-to-day operations with long-term business goals. These tools facilitate data-driven decision-making, thereby improving overall operational effectiveness.

An operational plan serves as a roadmap to achieving business objectives, ensuring every team member understands their role and how their efforts contribute to the larger mission. By setting clear goals, managing budgets, maintaining open communication, and utilizing the right tools, businesses can vastly improve their operational efficiency and strategic alignment.

Benefits of a Robust Operations Strategy

Cost savings and optimization.

A well-defined operations strategy helps businesses manage and optimize costs effectively. By streamlining processes and removing inefficiencies, companies can minimize waste and reduce expenses. This strategic approach enables organizations to allocate resources more judiciously, leading to better financial health and a stronger bottom line.

Customer Satisfaction

One of the significant advantages of a robust operations strategy is the ability to deliver high-quality products and services consistently. This reliability boosts customer satisfaction and loyalty. Enhancing customer experience is imperative for long-term success, as satisfied customers are more likely to become repeat buyers and brand advocates.

Operational Efficiency

A meticulously crafted operations strategy ensures that all business activities are optimized for maximum efficiency. By simplifying workflows and leveraging technology, companies can enhance productivity and reduce the time and resources needed to achieve operational objectives.

Market Competitiveness

Companies with strong operations strategies are better positioned to compete in their respective markets. By aligning operational activities with strategic goals, businesses can respond swiftly to market demands, leverage opportunities, and mitigate risks. This proactive approach offers a unique competitive edge, making it easier to thrive in a dynamic market environment.

Leveraging Technology for Operations Strategy

In today’s fast-paced business environment, leveraging technology is critical to maintaining an effective operations strategy. Technology doesn’t just support operational processes; it transforms them. From automating routine tasks to providing real-time data insights, technology enables organizations to streamline their operations, reduce costs, and improve productivity and efficiency.

Types of Impactful Technology

Several types of technology can significantly impact your operations strategy:

Production Line Automation: Automation tools can optimize workflows, reduce errors, and increase consistency in production processes.

Machine Learning: Leveraging machine learning algorithms can predict maintenance needs, analyze production data, and improve decision-making processes.

Business Process Automation (BPA) Software: Platforms like Creately’s visual workspace can automate repetitive tasks, ensuring that resources are used efficiently.

Real-Time Data Integration: Tools that provide real-time updates on various KPIs empower businesses to make data-driven decisions quickly and effectively.

Tools like Creately facilitate the creation and execution of an operations strategy with features like Strategy Mapping Software and Real-time Data Integration , making it easier to visualize and align strategic goals effectively within your organization.

Utilizing comprehensive tools like Creately facilitate thorough planning, seamless execution, and continuous improvement, ensuring your operations strategy is always aligned with your overarching business goals.

Integration Benefits

Integrating technology into your operations strategy offers numerous benefits:

Enhanced Efficiency: Automating routine processes frees up valuable time for employees to focus on more strategic tasks.

Improved Decision-Making: Real-time data integration and analysis tools, such as those offered by Creately, provide the insights needed for informed decision-making.

Increased Collaboration: Collaborative tools allow teams to work together seamlessly, regardless of their physical locations.

Reduced Costs: By optimizing processes and reducing manual errors, technology helps to cut down on operational costs, thereby increasing profitability.

Best Practices for Implementing an Operations Strategy

Implementing an operations strategy requires more than just a solid plan. It involves leveraging the right tools, adhering to proven best practices, and constantly measuring and adapting the strategy to suit evolving business needs. Here are some of the key practices, tools, and frameworks that can facilitate the implementation of your operations strategy.

Key Practices

Embedding these key practices into your strategy implementation can ensure better outcomes:

Define Clear Objectives: Establish specific, measurable, achievable, relevant, and time-bound SMART goals that align with your overarching business strategy.

Engage Stakeholders: Actively involve stakeholders at all levels to foster buy-in and ensure everyone is on the same page.

Document Everything: Maintain comprehensive documentation of all strategic decisions and changes to ensure clarity and accountability.

Communicate Effectively: Foster open communication channels within the organization to ensure smooth execution and alignment with business goals.

Monitor Performance: Use key performance indicators (KPIs) and other metrics to regularly track progress and make necessary adjustments.

Tools and Frameworks

Several tools and frameworks can assist in the successful implementation of your operations strategy:

Visual Strategy Mapping: Utilize visual tools like Creately’s Visual Strategy Mapping Software to create a clear and communicative visual representation of your strategy.

Market Analysis and Competitive Strategy: Regularly conduct market analysis and competitive benchmarking to stay ahead of industry trends and adjust your strategy accordingly.

Real-time Data Integration: Leverage real-time data integration to ensure that all stakeholders have access to the most current information, facilitating informed decision-making.

Analysis Frameworks: Employ various analysis frameworks like SWOT analysis, PESTLE analysis, and Porter’s Five Forces to thoroughly analyze internal and external factors impacting your operations strategy.

Project Management Software: Utilize tools like Creately to manage project timelines, resources, and ongoing tasks efficiently, ensuring a streamlined implementation process.

Measuring and Adapting

Continuous assessment and adaptation are crucial for the long-term success of an operations strategy. Follow these steps for effective measurement and adaptation:

Set Benchmarks: Establish initial benchmarks for various KPIs to gauge the performance against strategic objectives.

Regular Reviews: Conduct regular performance reviews to identify gaps and areas of improvement.

Incorporate Feedback: Actively seek feedback from various stakeholders and incorporate it into your strategic refinements.

Adapt to Changes: Stay agile and be prepared to adjust your strategy based on new data, market trends, and internal performance metrics.

Scale Up Successes: Identify successful elements of your strategy and scale them up across different departments and operations.

By incorporating these best practices, tools, and frameworks into your operations strategy implementation, you can ensure a more effective and dynamic approach to achieving your organizational goals.

In conclusion, an operations strategy is a vital framework that guides the efficient production and delivery of goods and services within an organization. It aligns daily operational activities with long-term business objectives, ensuring that every action contributes to overall success. The importance of a well-defined operations strategy lies in its ability to enhance competitive advantage, operational efficiency, and customer satisfaction.

Key components of an operations strategy include resources, technology, products/services, facilities, and production systems, all of which must be carefully managed and optimized. Different types of operational strategies, such as cost-based, quality-based, and flexibility strategies, can be employed depending on the business’s goals and market conditions.

Effective implementation of an operations strategy involves setting clear objectives, engaging stakeholders, leveraging technology, and continuously measuring and adapting the strategy to meet evolving needs. By following best practices and utilizing tools like visual strategy mapping and real-time data integration, businesses can streamline processes, reduce costs, and improve overall performance, positioning themselves for long-term success in a competitive market.

Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.

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Heroshe is a content specialist and a writer at Creately, online diagramming and collaboration tool. He is responsible for creating engaging, informative, and high-quality content that helps users understand and utilize the platform's features effectively. He mainly focuses on making complex concepts easy to grasp, and is passionate about art & music.

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Harris' economic plan would add over $1.7T to national debt: CRFB

The cost of new tax credits and spending in harris' plan would reach at least $1.95 trillion, partially offset by $250 billion, crfb found.

Steve Forbes: Kamala Harris economic plan is a Soviet-style system

Forbes chairman and editor-in-chief Steve Forbes reacts to Vice President Kamala Harris economic plan and price controls proposal on The Bottom Line.

A key part of Vice President Kamala Harris ' newly released economic agenda would add $1.7 trillion to America's growing national debt, according to a budget watchdog.

The plan, dubbed an "Agenda to Lower Costs for American Families," was released Friday as Harris lays out her platform in her campaign for president. It includes expansions of the Child Tax Credit and Earned Income Tax Credit, as well as an extension of the health insurance premium subsidies under the Affordable Care Act (aka ObamaCare) that are due to expire at the end of next year. It would also establish a new $25,000 tax credit for first-time homebuyers, expand tax credits for building affordable housing, create a $40 billion housing innovation fund, and seek to lower prescription drug prices through negotiations and increased transparency.

A rapid analysis by the nonpartisan Committee for a Responsible Federal Budget (CRFB) found that these plans would increase federal budget deficits by $1.7 trillion over the next decade. That figure would rise to $2 trillion if temporary housing policies the vice president has proposed are eventually made permanent.

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Vice President Harris' plan would add $1.7 trillion to the budget deficit over the next decade, according to the CRFB. (Peter Zay/Anadolu via / Getty Images)

The think tank noted that although the fact sheet released by the Harris campaign "is lacking certain details that would be necessary for a full analysis of these policies, many of them resemble proposals in the Biden-Harris Administration's most recent budget."

Based on CRFB's analysis of what the Harris campaign released, the cost of new tax credits and spending would total about $1.95 trillion over fiscal years 2026 to 2035 – which would rise to $2.25 trillion if the housing policies were made permanent. 

That figure would be partially offset by about $250 billion in savings from lower prescription drug costs, resulting in a $1.7 trillion increase to the deficit over that period. 

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Harris' overhaul of the child tax credit would be the most expensive component of the policy proposal she released Friday. (Elizabeth Conley/Houston Chronicle via / Getty Images)

The most expensive component of the plan would be the expansion of the Child Tax Credit (CTC) by making it fully refundable and increasing the base credit from $2,000 to $3,000, or to $3,600 for children under the age of 6. 

That would cost a total of $1.1 trillion over 10 years relative to the extension of the CTC and related policies as structured under the Tax Cuts and Jobs Act, while that figure would rise to $1.8 trillion when compared to current law given that CTC policies are slated to expire. 

It would also boost the credit for children in the first year of their lives to $6,000, which would cost a further $100 billion over a decade.

HOME BUILDERS TELL VP HARRIS HER HOUSING PLAN NEEDS TO ADDRESS REGULATORY BARRIERS

Vice President Harris and her running mate, Minnesota Gov. Tim Walz, have signaled they support the Biden-Harris budget's tax increases. (Melina Mara/The Washington Post via / Getty Images)

Extending the expansion of the ObamaCare premium tax credit would cost $400 billion over the decade. Increasing the Earned Income Tax Credit for workers without child dependents for tax purposes would cost $150 billion.

The $25,000 first-time homebuyer credit , which is scheduled to be in place for four years based on Harris' plan, would cost $100 billion over a decade based on her campaign's estimate of 4 million eligible homebuyers – though CRFB believes that number could be higher and result in additional costs.

Additional affordable housing policies included in her plan would also be in place for four years and would also cost $100 billion over 10 years, although CRFB notes that cost could differ due to not-yet-specified details of Harris' proposal.

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While the proposal released by her campaign didn't specify how they would be funded through higher taxes or spending reductions, Harris and her vice presidential nominee, Minnesota Gov. Tim Walz, have said they plan to "fulfill their commitment to fiscal responsibility, including by asking the wealthiest Americans and largest corporations to pay their fair share – steps that will allow us to make necessary investments in the middle class, while also reducing the deficit and strengthening our fiscal health."

Harris' announcement on Friday represents just a portion of her overall economic agenda. She has also said that she plans to release plans for education, child care and long-term care, among other policies.