When conducting business, there are two main types of expenses that small business owners need to track to understand pricing, budgeting, reporting, and profitability.
Operating expenses are costs that are directly related to the production of a product or delivery of a product or service—and to producing revenue. These include raw materials, parts, labor, and equipment, and can vary according to business activity.
Overhead expenses are what it costs simply to stay in business—your day-to-day business operations. These include costs such as:
- Rent and utilities
- Repairs and maintenance
- Office space and office equipment
- Certain taxes
- Management salaries
Overhead costs don’t vary much with business volume. Utility bills may vary seasonally and you may have more repairs one month than another, but these business expenses are more or less fixed. In fact, they are sometimes referred to as fixed costs.