Operating costs

Operating costs make up a substantial part of a business's expenses and are directly tied to the day-to-day running of the business. This includes all the costs necessary for the production and sale of goods or services, and they are kept separate from financial costs in the profit and loss account.

The operating profit

The operating profit is arrived at by deducting the operating costs from the operating revenue: Operating profit = Operating revenue – Operating costs. If a business has operating revenue of NOK 5 000 000 and operating costs of NOK 4 200 000, the operating profit is NOK 800 000, before financial items and tax are taken into account.

Why do operating costs matter?

Understanding operating costs is essential for effective business management and profitability analysis.

• Budgeting: An accurate overview of operating costs is necessary in order to draw up realistic budgets and financial forecasts.
• Pricing: Knowledge of total operating costs helps businesses set prices that not only cover the costs of production, but also generate a sufficient profit.
• Cost control: In order to improve profitability, businesses must strive to minimise their operating costs without sacrificing quality or operational efficiency.
• Financial analysis: Operating costs play a central role in various financial key figures and analyses used to evaluate a business's financial health.

Tips for reducing operating costs

1. Make processes more efficient: Automate and streamline administrative work in order to reduce the time spent and the need for labour. Look particularly at routine tasks such as invoicing, reporting and follow-up, where technology can take over much of the manual work.
2. Negotiate better agreements: Go through your agreements for rent, insurance, subscriptions and other running services regularly. Many supplier agreements are rolled over year after year without being reassessed, and a simple review can produce considerable savings.
3. Reduce energy consumption: Energy-efficient investments, such as better insulation, LED lighting or control systems for heating, reduce costs over time and often pay for themselves within a few years.
4. Make room for a flexible working environment: Working from home or flexible working hours can reduce office costs such as rent and electricity, while also increasing employee satisfaction and productivity.
5. Be strategic about marketing: Prioritise the budget towards the channels that actually deliver results, based on continuous analysis of their effect. Cut or scale back the effort on channels that give little in return.