Operating Expenses: Common Categories to Know

Organize Your Operating Expenses by Functional Categories

When operating and managing a business, getting a better understanding of your expenses by operating and functional categories can go a long way in enabling better decisions.

Every organization has a unique chart of accounts and different operating models that dictate which line items are relevant and where costs should be allocated and assigned.

Regardless of this, business operators and owners should attempt to take a higher level view into where investments are being made, so that appropriate adjustments or continued business actions should be taken.

As a rule of thumb for most organizations, there are three major functional operating expense categories that most businesses can align on and use to organize expenses:

1. Sales and marketing expenses

2. Research and development expenses

3. General and administrative expenses

Each of these are composed of similar details, such as personnel costs (i.e., salaries and wages, payroll taxes, benefits, bonuses, commissions, travel and entertainment) and non-personnel costs (i.e., technology / tooling costs, advertising expenses, office supplies, rent costs, bank fees).

But regardless of these similarities, being able to assign expenses into functional categories above provide insight into which part of operations consume most of the operating cost structure or may require additional investment.

Operating Expense Categories Explained

Although they may seem intuitive and self-explanatory, many organizations struggle to get a true handle of their operating costs organized into clean, functional categories.

This ‘quick-and-dirty’ reference guide help to provide you a guidepost into where costs across an organization can / should be assigned. Use the following, high-level explanations in each category:

1. Sales and marketing: as the name suggests, sales and marketing expenses represent all of the personnel and non-personnel expenses related to your sales and marketing (go-to-market teams) departments. The most common items within this functional category are wages, tooling, commissions, ad spend, and contractor spend.

2. Research and development: research and development expenses represent the personnel and non-personnel expenses related to your engineering, development, scientific, and product departments. Like sales and marketing costs, common items include wages, tooling, bonuses, and contractor spend.

3. General and administrative: finally, general and administrative expenses represent the personnel and non-personnel expenses related to your supporting organizations, like executives, finance / accounting, and HR. Common items wages, tooling, shared services, bonuses, office expenses, bank fees, insurance costs, and accounting, tax, and audit costs.

Where and How to Start Organizing Your Expense Base

Now that you have a solid fundamental understanding of the types of functional categories, you should start to organize each of the detailed line items into buckets.

You can ask your bookkeeper or accounting / finance team members to map your line items into specific, clean functional categories so that once you finalize your financial statements, they can map directly into the appropriate cost categories.

Starting with your chart of accounts and unique line items is a great start and allow you to build from the bottom-up.

From there, once you add new line items or new cost categories, you have a repeatable set of behaviors that provide you with scalable solutions to analyzing and evaluating your operating cost structure and investment categories.

Over time, you can begin to run different analytics, like how much you spend on different functional categories as a percentage of your total revenue base or do a period-over-period comparison of your expenses in different categories to see where you are investing or may need to invest to drive further business scale and growth.

Start and Get the Basics Right for Operating Expenses

When you are busy running a business, organizing your internal financial statements may be overlooked and not something you personally spend a lot of your time or your team’s time on.

But in order to make improvements in your business, having a baseline understanding of your cost categories and where investments are made is a necessity.

At Valuate, we want to provide folks with the insight and tools to adequately organize and compare their business metrics to create a simpler path to making business improvements and enhancements.

Making decisions based on the right data should not be difficult, which is why Valuate exists to empower business owners and operators to know if their financial metrics are doing well, and create tasks and attributions to improve them.

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