We have talked quite a bit about the Revenue Side of a Business Plan. I want to cover part of the expense side of a business today and that is the Operational Expense or OPEX. OPEX generally represents the fixed cost of a business. This means all the costs that a business would have if it did not sell anything (NOTE: I am using this as a simplification, because yes this is not the precise definition but works very well for small businesses). This would include rent, utilities, most salaries, insurance, and similar items. Cost of Goods Sold (COGS) is the other kind of expense and that is generally reserved for the costs associated with delivering services or the costs of making products. There can be some tricky overlaps, but things will be okay if you are consistent with the way you are accounting for these costs.
The first problem is inflation. Every year the costs to run a business tend to go up. This might be the cost of advertising or health insurance. But these costs can be just about anything. When I was at AFC, we estimated these costs to go up about 7% a year. This leads to a loss of profit year-over-year without some changes. The easiest change is to increase revenue to cover these cost increases. However, there may be other ways that can be used to lower these costs. These will be covered in a separate post but become many of the initiatives that happen within a company.
The second problem is one of accounting. As I said about the challenges with defining OPEX and COGS above, there are other problems in evaluating costs in small business. The one that is most likely is the personal costs that are run through the business. Some of these are widespread. An example would be the expense of the family’s cell phone plan as an expense to the business. There are more difficult problems as well. For example, I was evaluating a company in southern California where the owner ran a $190K "Tennant Improvement" for his "Home Office" through his business. Because of this (and other expenses), the owner can dramatically underpay himself. All of this is good for tax purposes but can make objective analysis of the business difficult.
So, we will be spending time looking at expenses and how they can be looked at separately and together with the Revenue side of business.
Have a great day!
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