operation cost in business plan

• Search Search Please fill out this field.

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

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.

Investopedia / Joules Garcia

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.

• Accounting History and Terminology 1 of 35
• Absorption Costing Explained, With Pros and Cons and Example 2 of 35
• What Is an Amortization Schedule? How to Calculate with Formula 3 of 35
• Average Collection Period Formula, How It Works, Example 4 of 35
• Bill of Lading: Meaning, Types, Example, and Purpose 5 of 35
• What Is a Cash Book? How Cash Books Work, With Examples 6 of 35
• Cost of Debt: What It Means and Formulas 7 of 35
• Cost of Equity Definition, Formula, and Example 8 of 35
• Cost-Volume-Profit (CVP) Analysis: What It Is and the Formula for Calculating It 9 of 35
• Current Account: Definition and What Influences It 10 of 35
• Days Payable Outstanding (DPO) Defined and How It's Calculated 11 of 35
• Depreciation: Definition and Types, With Calculation Examples 12 of 35
• Double-Declining Balance (DDB) Depreciation Method Definition With Formula 13 of 35
• EBITDA: Definition, Calculation Formulas, History, and Criticisms 14 of 35
• Economic Order Quantity: What Does It Mean and Who Is It Important For? 15 of 35
• 4 Factors of Production Explained With Examples 16 of 35
• Fiscal Year: What It Is and Advantages Over Calendar Year 17 of 35
• How a General Ledger Works With Double-Entry Accounting Along With Examples 18 of 35
• Just-in-Time (JIT): Definition, Example, and Pros & Cons 19 of 35
• Net Operating Loss (NOL): Definition and Carryforward Rules 20 of 35
• NRV: What Net Realizable Value Is and a Formula To Calculate It 21 of 35
• No-Shop Clause: Meaning, Examples and Exceptions 22 of 35
• Operating Costs Definition: Formula, Types, and Real-World Examples 23 of 35
• Operating Profit: How to Calculate, What It Tells You, and Example 24 of 35
• Production Costs: What They Are and How to Calculate Them 25 of 35
• What Is a Pro Forma Invoice? Required Information and Example 26 of 35
• Retained Earnings in Accounting and What They Can Tell You 27 of 35
• Revenue Recognition: What It Means in Accounting and the 5 Steps 28 of 35
• What Is a Sunk Cost—and the Sunk Cost Fallacy? 29 of 35
• Triple Bottom Line 30 of 35
• Variable Cost: What It Is and How to Calculate It 31 of 35
• Work-in-Progress (WIP) Definition With Examples 32 of 35
• Write-Offs: Understanding Different Types To Save on Taxes 33 of 35
• Year-Over-Year (YOY): What It Means, How It's Used in Finance 34 of 35
• Zero-Based Budgeting: What It Is and How to Use It 35 of 35

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

• Search Search Please fill out this field.
• Building Your Business
• Becoming an Owner
• Business Plans

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.

Want to read more content like this? Sign up for The Balance's newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!

How to Write the Operations Section of Your Business Plan

2 min. read

Updated January 3, 2024

The operations plan covers what makes your business run. It explains the day-to-day workflows for your business and how you will deliver the product or service that you offer. As part of your plan, it’s your chance to describe what you’ve set up so far and that you understand what is still left to make your business fully operational.

• How to write about business operations

Like some of the other sections in your plan, the information you include fully depends on your type of business. If you run a subscription box service you’ll need to cover how you source and fulfill each order. If it’s a service-oriented business (like a mechanic or coffee shop) you’ll need to go into more detail about your location as well as the tools and technology you use.

The important thing is that the information here fully addresses how your business runs.

What to include in your operations plan

The components of your operations plan fully depend on what’s necessary to produce your product or service. For most, you’ll be adding details about your location and facilities, the technology being used, and any equipment or tools.

Location and facilities

The information you include about your business location fully depends on the state, city, and neighborhood you’ve chosen. This will determine the specific taxes, registration, licenses, permits, zoning laws, and other regulations you’ll be subjected to.

Once you’ve legally established your business be sure to reference the relevant paperwork and legal documentation in this section. You may also want to point to mockups of the building, copies of legal agreements, and any other supporting documentation for how valuable the property is and how it helps your business function.

Sourcing and fulfillment

How will you create your product/service and what will it cost? You’ll include detailed breakdowns in your financial plan, but here you’ll talk about what it will take, who you will work with, and any alternatives.

How and when to write about technology

Is your product or service driven by a specific technology or process? Let investors, banks, or other necessary parties know why it’s a valuable part of your business.

Brought to you by

Create a professional business plan

Using ai and step-by-step instructions.

Secure funding

Validate ideas

Build a strategy

• Why you need an operational plan

Understanding your business operations makes your processes real. It ensures that you have organized steps in place to produce a product or service.

For investors, this helps prove that you know what you’re doing and can back up the rest of your plan with actual work that makes it happen. For you as a business owner, it’s a starting point for optimization. You have a blueprint for how things work. And as you run your business, can begin to identify opportunities for improvement.

If you don’t cover operations as part of your business plan, then you’re flying blindly. There’s no documented process for how things should work and no connection to the other strategic elements of your business.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.

Table of Contents

• What to include

Related Articles

10 Min. Read

How to Set and Use Milestones in Your Business Plan

6 Min. Read

How to Write Your Business Plan Cover Page + Template

3 Min. Read

What to Include in Your Business Plan Appendix

How to Write a Competitive Analysis for Your Business Plan

The Bplans Newsletter

The Bplans Weekly

Subscribe now for weekly advice and free downloadable resources to help start and grow your business.

We care about your privacy. See our privacy policy .

The quickest way to turn a business idea into a business plan

Fill-in-the-blanks and automatic financials make it easy.

No thanks, I prefer writing 40-page documents.

Discover the world’s #1 plan building software

Business Plan Operational Plan - Everything You Need to Know

Welcome to our comprehensive guide on the business plan operational plan. A fundamental component of any effective business plan and a key component of growth  As a business owner, executive, or manager, you understand that a well-articulated strategy is crucial for the success and growth of your venture. But have you ever stopped to ponder how this strategy is executed on a day-to-day basis? How do we transform those lofty goals into tangible, everyday actions? This is where an operational plan comes into play. An operational plan outlines the practical details of how your business will operate and deliver on its strategic goals. It describes the inner workings of your business, detailing everything from your daily operations and production processes to your team's roles and responsibilities.  In this guide we will delve into the purpose and scope of an operational plan, its essential elements, and how to develop one effectively. We'll also share valuable tips, best practices, and common pitfalls to avoid. 

Table of Contents

• Operational Plan - The Purpose
• The Essential Elements
• Description of Operations
• Steps for Creating Operational Plan
• Tips & Best Practices

Real-Life Case Study

• Common Pitfalls
• Final Thoughts

Business Plan Operational Plan - The Purpose

The role of an operational plan in a business cannot be overstated. This fundamental document is a strategic guide that outlines the direction, timelines, and resources necessary to achieve specific objectives within an organisation. An operational plan is the driving force behind the execution of your business strategy. It allows you to map out clear and attainable operational goals that align with your overall strategic objectives, breaking them down into manageable, actionable steps.  Whilst acting as a map for your business you can also use to track performance via measurable objectives.

Scope of an Operational Plan in Day-to-Day Operations

The business plan operational plan should detail key elements such as the operational processes, resource allocation, tasks, and timelines. From personnel and location to inventory, suppliers, and operating hours - the operational plan touches every aspect of your business. It's a living document, evolving and changing as your business grows and adapts to market dynamics and industry trends.

Remember, the opening of your Executive Summary sets the tone for the entire document. Make it memorable and compelling to encourage the reader to continue exploring.

Business Plan Operational Plan - The Essential Elements

Creating an operational plan requires thoughtful consideration of several vital components that collectively represent the full breadth of your company's operations. Each one plays a crucial role in defining the day-to-day activities that will lead to the fulfilment of your strategic objectives.

Description of the Business Operations

Every operational plan starts with a comprehensive description of the business operations. This includes outlining your production process, operations workflow, and supply chain management. Defining these processes in clear terms provides a concrete vision of how products or services will be created and delivered, identifying the necessary resources and potential bottlenecks along the way.

People are the lifeblood of your business, and it's essential to define their roles and responsibilities within the operational plan. This involves outlining the team's structure, detailing who is responsible for what, and defining key performance indicators (KPIs) for each role. By assigning clear responsibilities, you ensure the efficient use of human resources and promote accountability.

Your business location and the physical resources at your disposal play a crucial role in your operational plan. Detail the premises your business will operate from, the equipment required, and any associated costs. Whether you're operating from a single office, managing multiple retail outlets, or running a home-based online business, defining your operational space is crucial.

Effective inventory management is crucial for maintaining smooth operations, particularly for businesses dealing with physical products. Your operational plan should outline how you will manage your supplies, including how often you'll restock, which vendors you'll use, and how you'll handle storage and distribution. Remember, balancing supply with demand is key to avoiding unnecessary costs or stockouts.

Your operational plan needs to address your suppliers - who they are, what terms and agreements you have with them, and how you will manage these relationships. The reliability and quality of your suppliers can greatly affect your operations, making this a critical consideration in your planning process.

When constructed effectively, these elements come together to form an operational plan that is clear, comprehensive, and actionable. In the next section, we'll explore the steps to develop such a plan, and later, we'll offer some tips and best practices for bringing your operational plan to life. Stay tuned! Looking an industry specific guide to business plans, then check out our business plan guides homepage .

Steps for Developing an Operational Plan

Creating a comprehensive and effective operational plan involves careful planning, clear communication, and continuous monitoring and evaluation. Let's explore these steps in detail:

• 1. Setting Clear Operational Goals and Objectives: The first step towards developing an operational plan is defining what you want to achieve operationally within a given period. These goals should align with your strategic business objectives and be specific, measurable, attainable, relevant, and time-bound (SMART).For instance, if your strategic goal is to increase market share, your operational objective might be to ramp up production by a certain percentage within the next quarter. Or, if you aim to improve customer satisfaction, you might focus on improving the quality and durability of the product.
• Regular Monitoring and Evaluation: With your operational goals in place, the next step is to monitor progress and evaluate performance regularly. Key Performance Indicators (KPIs) and metrics should be set for each operational goal. These could range from production volumes and delivery times to quality measures and cost efficiency.Consistently monitoring these metrics allows you to measure progress, identify any potential issues or bottlenecks early on, and adjust your operational plan as necessary.
• Communication: This is a crucial when implementing your operational plan. Ensure all stakeholders, including team members, suppliers, and partners, are aware of the plan and understand their roles within it.Hold regular meetings to update everyone on progress and address any challenges or changes in the plan. Remember, your operational plan should be a living document, flexible enough to adapt to changes and updates as required.

Business Plan Operational Plan - Tips and Best Practices

Creating an operational plan that works requires more than just defining goals and setting performance metrics. There are nuances and best practices that can significantly enhance the effectiveness of your operational plan. Here are a few tips to guide you:

• Involve Your Team : The people responsible for executing the operational plan should also contribute to its creation. Encourage your team to share their ideas, challenges, and insights. Their first-hand experience can lead to more practical, achievable operational plans. Besides, team involvement promotes ownership and commitment to the plan's execution.
• Keep It Flexible : Operational plans need to be adaptable to accommodate changes in the business environment, such as market dynamics, customer preferences, or new regulations. Regularly review and update your plan to ensure it remains relevant and effective. Remember, the operational plan is a guide, not a set-in-stone document.
• Be Specific : Avoid ambiguity in your operational plan. Use clear, concise language and provide detailed action plans, including what needs to be done, by whom, when, and with what resources. This clarity reduces misunderstanding and keeps everyone on the same page.
• Use Technology : Leverage the power of technology to enhance your operational efficiency. There are numerous tools and software available that can help with project management, process automation, data analysis, and more. Use these tools to streamline your operations, track performance, and improve communication.
• Consistency with the Business Plan : Ensure your operational plan aligns with your broader business strategy. This alignment ensures that your day-to-day operations contribute effectively to achieving your long-term business objectives.

By applying these tips and best practices, you can create an operational plan that's not only effective but also fosters a culture of continuous improvement and strategic alignment in your organisation.

To further illustrate the importance of a well-executed operational plan, let's look at a real-life case study - the global tech giant, Apple Inc. Apple's operational plan is a testament to the company's relentless focus on precision, quality, and groundbreaking innovation. One key operational strategy that Apple uses is its tight control over its supply chain.

• Description of Business Operations: Apple's business operations are highly integrated and efficient. They manufacture and market a variety of products, including iPhones, iPads, Macs, and services like iCloud and Apple Music. Their production process is complex, involving design, prototyping, manufacturing, and distribution, often happening across different continents.
• Personnel: Apple's workforce is highly specialised. Each team and department has clearly defined roles and responsibilities, whether it's designing new products, managing supplier relationships, or ensuring quality control. Employees at Apple are encouraged to think differently, fostering a culture of innovation.
•  Location: Apple operates in multiple locations worldwide, including its iconic headquarters, Apple Park, in Cupertino, California. The company also has a network of retail stores across the globe and contracts with manufacturing facilities, primarily in Asia.
•  Inventory: Apple's inventory management is legendary for its efficiency. Through just-in-time inventory practices, Apple reduces storage costs and minimises the risk of stock obsolescence, contributing to its streamlined operations and impressive profit margins.
• Suppliers: Apple has a vast network of suppliers from around the world. It maintains strong relationships with these suppliers and holds them to strict standards of quality and ethical business practices, ensuring the integrity and excellence of its products.

Apple's operational plan aligns seamlessly with its business strategy, focusing on innovation, quality, and customer experience. This has allowed the company to maintain its status as a market leader and pioneer in the tech industry. This case study illustrates how an effective operational plan can turn a strategic vision into a successful reality. In the next section, we'll delve into common pitfalls to avoid when creating your operational plan.

Common Pitfalls to Avoid

As you embark on developing an operational plan for your business, it's crucial to be aware of some common pitfalls that can hinder your plan's effectiveness. Here, we outline these potential obstacles and provide advice on how to avoid them.

• Lack of Alignment with Strategic Goals: One of the most common mistakes is a disconnect between the operational plan and the company's strategic goals. Your operational plan should directly support and drive towards achieving these objectives. Ensure all operational goals, processes, and tasks align with your overarching business vision.
• Overly Complex or Unrealistic Plans: While an operational plan needs to be comprehensive, it also needs to be practical and achievable. Avoid creating overly complex plans that your team cannot implement or that require resources beyond your means. Strike a balance between thoroughness and simplicity for a more manageable plan.
• Neglecting to Involve the Team: Your team members are the ones who will execute the operational plan, and neglecting to involve them in its creation can lead to resistance or confusion. Make sure your team is part of the planning process, understands the plan, and is committed to its implementation.
• Ignoring Market Changes: A business doesn't operate in a vacuum. Failing to consider external factors such as market trends, customer behaviour, and economic conditions can derail your operational plan. Ensure your plan is flexible and adaptable to respond to changing circumstances.
• Insufficient Monitoring and Evaluation: An operational plan is not a set-and-forget document. Regular monitoring and evaluation are critical to assess progress, identify bottlenecks, and make necessary adjustments. Make sure you set measurable KPIs and allocate resources to track and review them.Avoiding these common pitfalls will significantly enhance the effectiveness of your business plan operational plan. With a solid operational plan in place, your business is well-positioned to achieve its strategic objectives, driving growth, and success.

Wrapping It All Up

Operational planning plays a vital role in any business, acting as a roadmap to direct daily operations and align them with the strategic goals of the company. As we have seen in this blog post, creating an operational plan involves several important components and steps, from defining clear goals to continuous monitoring and evaluation. Remember, the key to an effective operational plan is to keep it flexible, involve your team and maintain alignment with your business plan. If you implement those principles and regularly review and update you will have set a solid foundation for future business growth. We wish you all the best on your operational planning journey, and remember - every step you take towards detailed and thoughtful planning is a step towards long-term success and growth for your business. If you require any further help on other sections of your business plan, visit our Learning Zone for several in-depth guides.

Business Plan Operational Plan - Frequently Asked Questions (FAQs)

To wrap up this guide, let's address some frequently asked questions about operational plans in business.

• What is the difference between a strategic plan and an operational plan? A strategic plan outlines a company's long-term vision, objectives, and strategies for achieving those objectives. It's a high-level roadmap for the direction the company intends to go. On the other hand, an operational plan details the day-to-day activities and resources necessary to achieve the strategic goals. It's the 'action plan' that brings the strategic plan to life.
• How often should an operational plan be reviewed? The frequency of review may vary depending on your business size, type, and industry, but generally, it is a good idea to review your operational plan at least quarterly. The regular review ensures that the plan is still relevant and effective, allowing for adjustments as business conditions change.
• How long should an operational plan be? There is no set length for an operational plan, as it will depend on the complexity of the operations. It needs to be comprehensive enough to cover all operational aspects of the business but concise enough to be understandable and manageable.
• Who is responsible for creating an operational plan? While the business owner or top management usually leads the creation of an operational plan, it should involve input from all levels of the organisation. Each department or team can provide valuable insights into their operations, challenges, and opportunities, leading to a more realistic and effective plan.
• How can I measure the success of my operational plan? The success of an operational plan is measured by how effectively it helps achieve the strategic objectives. Regular monitoring of Key Performance Indicators (KPIs) related to your operational goals will provide a clear indication of your plan's success. If these KPIs are consistently met, your operational plan is likely successful. If not, adjustments may be needed.

• Travel & Expense Management Software
• Employee Tax Benefits
• Branch Petty Cash
• FleetXpress
• Prepaid cards
• World Travel Card
• Customer Speaks
• Press Release
• Partner with us

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,…
• Financial Analysis: What is it, Types, Objectives,…
• Explicit Cost: Definition, Types, Calculations and Examples
• Unit Cost: What is it, Types Formula, Calculation…

Expense Ratio: What is it, Components, Formula and How to Calculate?

Discussion about this post, table of contents toggle table of content toggle, related articles, get started with happay now.

If you are looking to understand how our products will fit with your organisation needs, fill in the form to schedule a demo.

Schedule a demo

© 2023 Happay

Welcome Back!

Login to your account below

Remember Me

Retrieve your password

Please enter your username or email address to reset your password.

From Idea to Foundation

Master the Essentials: Laying the Groundwork for Lasting Business Success. 

Funding and Approval Toolkit

Shape the future of your business, business moves fast. stay informed..

Discover the Best Tools for Business Plans

Learn from the business planning experts, resources to help you get ahead, startup & operational costs, table of contents, introduction.

Data from reputable organizations like the U.S. Chamber of Commerce and Kaufman Foundation reveal a sobering truth: a significant number of businesses falter and fail within their first few years. One of the critical reasons behind this high failure rate is an inadequate understanding of startup and operating costs. Businesses often stumble due to undercapitalization, inefficient budgeting, and unrealistic financial planning, directly linked to a lack of comprehensive startup and operational cost analysis.

By offering a detailed exploration of startup and operating costs, we aim to equip you with the knowledge and tools necessary for accurate financial assessment and planning. This step is about fostering a deep understanding of the financial framework your business operates within. 

With this comprehensive guide, you’ll gain the insight needed to make informed decisions, set realistic budgets, and price your products or services appropriately. Ultimately, this understanding can be the difference between a business that merely survives and one that thrives. As we move forward on this detailed roadmap, prepare to arm yourself with knowledge that will crucially impact the longevity and success of your venture.

Pro Tip: 

Review ‘Operations in Detail’: If you haven’t thoroughly examined the ‘Operations in Detail’ step or need a refresher, it’s essential to revisit this step. Understanding the operational aspects of your business is critical before you can accurately assess the financial implications.

Understanding Costs

Challenges in startup finance.

Navigating the financial aspects of starting a business is a complex task, often riddled with challenges that can significantly impact the success and sustainability of the venture. In this step, we address some of the most common financial hurdles entrepreneurs face and provide guidance on how to overcome them.

Key Takeaways: Financial Hurdles

• Undercapitalization: Many startups underestimate the capital required to launch and sustain their business until it becomes profitable. This oversight can lead to a cash flow crisis, with the business running out of money prematurely.
• Inadequate Budgeting: A clear understanding of cost structures and operating expenses is vital. Without it, creating an accurate budget is challenging, often leading to over or underspending in critical areas.
• Pricing Issues: Properly setting prices for products or services is crucial. Misjudging costs can result in uncompetitive pricing or, worse, selling at a loss.
• Poor Financial Planning: Comprehensive knowledge of startup and operating costs is essential for realistic financial projections, crucial for effective decision-making and strategic planning.
• Difficulty in Securing Funding: Detailed financial plans and cost analyses are typically required by investors and lenders. Inability to provide this information can make securing necessary funding challenging or, more likely, impossible.
• Operational Inefficiencies: Without a clear grasp of operating costs, identifying areas for cost reduction or efficiency improvements can be difficult, leading to wasteful practices.
• Risk of Business Failure: Ultimately, a lack of understanding of the full financial picture significantly raises the risk of business failure, particularly in the crucial early stages of operation.

Categories of Startup Costs

Your startup costs is the capital you spend before you open your doors to customers and can be broadly categorized into assets, expenses, and working capital, each with its own set of subcategories. It’s crucial to consider various aspects like lease vs. buy decisions, supply ordering strategies, and staffing choices. The following gives an overview of of startup assets, expenses, and working capital: 

Startup assets for a pre-revenue startup are the tangible and intangible resources acquired to create a foundation for the business’s operations and growth. These assets include physical items like equipment and inventory, as well as intellectual properties and digital assets, which provide long-term value and contribute to the startup’s capability, unlike startup expenses that are consumed or depleted through the initial setup. Subcategories for startup assets often include: 

Tangible Assets

• Real Estate: Land and buildings.
• Equipment: Machinery, computers, office equipment.
• Vehicles: Cars, trucks, or vans used for business purposes.
• Furniture and Fixtures: Desks, chairs, lighting, shelving.
• Inventory: Stock of products for sale.
• Equipment: Computers, tablets, servers, displays, phones, printers.
• Safety and Security Equipment: Surveillance cameras, alarms.

Intangible Assets

• Brand and Intellectual Property: Trademarks, patents, copyrights.
• Software and Technology: Custom software, tech tools, digital assets.
• Goodwill: Value attributed to acquiring a brand, its reputation, and its customer relationships.
• Non-Standard Licenses and Permits: Specific industry-related licenses where the license has a value if the business was sold (e.g., liquor license, cannabis license).

Other Assets

• Refundable Deposits: Security deposits for utilities or rent.

Expenses:  

Startup expenses for a pre-revenue startup are the initial outlays necessary to establish and prepare the business for operation, including legal and administrative setup, securing a location, initial marketing, and workforce preparation. Unlike startup assets, which are tangible and intangible items of value the business owns, these expenses are one-time costs primarily aimed at setting up the business infrastructure and operational framework, without residual value or future liquidity. Examples of common startup expense subcategories include: 

Legal and Administrative Expenses

• Legal Fees: Costs for legal advice, company registration, incorporation, patents, and trademarks.
• Licenses and Permits: Fees for obtaining necessary legal permissions to operate.
• Business Planning: Expenses for developing business strategy, model, and plans.
• Consultancy Fees: Expenses for professional services like business consultants, accountants.

Location and Infrastructure Setup

• Broker Fees: Initial payments and fees for securing a business location.
• Utility Set-Up Fees: Initial fees for setting up essential utilities like electricity, water, and internet.

Insurance and Risk Management

• Insurance Deposits: Initial deposits for various business insurance policies.
• Business Insurance Premiums for First Term: Initial premium payments for business-related insurance policies.

Marketing and Branding

• Branding: Costs for creating brand identity, including logo design.
• Initial Marketing and Public Relations: Costs for establishing initial market presence and public relations efforts.
• Website Development : Expenses for website creation, hosting, and pre-launch maintenance.
• Advertising for Launch: Pre-launch marketing and promotional activities.

Human Resources

• Training Period Salaries and Wages: Compensation for employees during training before business operation begins.
• Pre-Launch Employee Recruitment and Training Costs: Expenses related to hiring and training the initial workforce.

Research and Development

• Market Research: Costs for analyzing market trends, customer preferences, and competition.
• Prototype Development: Costs associated with creating prototypes or initial service models.

Miscellaneous Preparation Costs

• Software and Subscriptions: Pre-operational expenses for business software and service subscriptions.
• Travel and Survey Expenses: Costs associated with market surveys, business location visits, and other pre-operating travel.

Working Capital:  

Working capital for a pre-revenue startup refers to the allocation of cash reserves to cover estimated monthly operating expenses (burn-rate components) and short-term liabilities, along with a buffer for contingencies. This capital is essential to support the startup’s operations through to the point of break-even or until it secures the next round of financing, such as moving from seed to Series A funding, with the amount and duration varying significantly based on the business type and strategy. Common examples of working capital allocations include: 

Cash Reserves

• Initial Funding: Seed capital or initial investment funds obtained through investors, personal savings, loans, or grants.
• Emergency Fund: Additional reserve funds to cover unforeseen expenses or delays in reaching revenue-generating stages.

Monthly Operating Expenses (Burn Rate Components)

• Salaries and Wages: Monthly payroll for employees, including founders and early staff.
• Office Rent and Utilities: Monthly costs for office space, electricity, internet, and other utilities.
• Software and Subscription Services: Regular expenses for essential software, cloud services, and subscriptions necessary for operation.
• Marketing and Advertising: Monthly costs for marketing activities to build brand presence and customer awareness.
• Insurance Premiums: Regular payments for necessary business insurance policies.
• Professional Services: Fees for legal, accounting, and consulting services.
• Research and Development: Ongoing costs for product development, testing, and improvement.

Short-Term Liabilities

• Accounts Payable: Short-term debts or obligations to vendors and service providers.
• Accrued Expenses: Incurred expenses that are recorded but not yet paid.

Buffer for Contingencies

• Contingency Buffer: An additional percentage of the total working capital estimated to cover unexpected costs or delays.

We have developed worksheets for hundreds of common Core Offerings to assist in brainstorming these costs. Download our Startup Cost Worksheet to get started.

Key to Building a Solid Foundation

Feeling overwhelmed.

If you find yourself overwhelmed at this step of estimating startup and operating costs, it might be a sign to revisit earlier steps of the Pre-Planning Process. A thorough and well-executed Business Model Development and Operations in Detail step can significantly ease the burden of this step.

• Revisit Business Model Development: Ensure you have a clear and comprehensive understanding of your business model. This step provides a blueprint that guides your financial planning.
• Review Operations in Detail: A detailed analysis of Key Activities, Key Resources, and Key Partners is crucial. If this step is thoroughly executed, estimating costs becomes a more straightforward research task.

Accurate Cost Analysis

Once you have identified the operational components, research becomes your primary tool. 

Practical Steps in Research:

• For HR costs, utilize platforms like salary.com and Indeed to understand local pay scales and employment benefits.
• Contact vendors and partners for quotes and cost structures.
• Utilize online resources for fixed costs like cloud storage, utilities, and office supplies.

Pre-Planning is a Discipline

• Importance of Granularity: This step demands granularity. Each cost, no matter how small, should be accounted for to build a realistic financial picture.
• Avoiding Premature Adaptations: Remember, this is the Pre-Planning phase. The goal here is not to adapt or make operational decisions based on things you cannot know but to create a solid foundation for your business plan or pitch. Changes and adaptations come later, once you start considering funding methods and adapting to sales, market, or operational realities.

By approaching this step with diligence and attention to detail, you lay the groundwork for a strong and realistic financial plan. This foundation is crucial not only for the initial launch but also for the long-term sustainability and success of your business.

Adjusting for Business Type and Stage

Understanding the distinction between traditional and innovative or new market business ventures is critical when planning startup costs. Each type demands a different approach and perspective on financial planning.

• Traditional Businesses: These are established business models with predictable patterns and well-understood markets. For example, a daycare center needs to consider costs for licensing, facility rental, child care supplies, and staff training. A legal firm has to budget for office space, legal databases, and professional staff. These businesses must think through all elements necessary to become fully operational from the start, aiming for rapid achievement of break-even status.
• Innovative or New Market Ventures: Contrasting with traditional models, these ventures often break new ground or create entirely new markets. For instance, a tech startup developing a unique app may initially focus on costs related to software development, securing intellectual property rights, and market testing. Their startup costs might be leaner if they concentrate on developing a minimum viable product (MVP) and reaching early adopters. The goal is often to demonstrate potential and secure further funding, following milestones like user growth or feature development.

Traditional businesses typically require a comprehensive, all-encompassing financial plan upfront. In contrast, innovative ventures may operate on a more performance-based approach, aligning their financial planning with specific milestones and funding stages like pre-seed or seed rounds.

Recognizing which category your business falls into and planning accordingly can significantly impact the efficiency and effectiveness of your financial strategy.

Tools and Resources for Startup and Operating Cost Attribution

Get your startup and operating cost worksheet.

Efficiently navigate the complexities of startup and operating costs with our comprehensive worksheet, designed to streamline your financial planning process. Available in both MS Excel and Google Sheets formats, this versatile tool offers a structured approach to categorize and calculate various costs.

Analyzing Operating Costs

Day-to-Day Business Expenses

Operating costs form a substantial part of any business’s financial structure. These are the recurring costs necessary for the day-to-day functioning of the business and can be broadly classified into fixed and variable expenses. Additionally, entrepreneurs must account for elements like depreciation, payroll taxes and benefits, and potential interest expenses.

Categorization of Operating Costs

• Fixed Expenses: These are costs that remain constant regardless of business performance, such as rent, salaries (to an extent), and insurance.
• Variable Expenses: Costs that fluctuate based on the level of business activity. Examples include utilities, raw material costs, and commission-based salaries.
• Additional Considerations: Depreciation of assets, payroll-related taxes and benefits, and interest expenses, which may become relevant in cases of debt financing.

Estimation: Implications and Accuracy

• Striving for Granularity: While it’s challenging to perfectly estimate operating costs, aiming for 85% accuracy can significantly reduce financial risks. Many business failures are linked to imprecise cost estimations, leading to the issues highlighted previously. If you aim to get a solid B+ here and have allocated a portion of your working capital for emergency funds and contingencies, you’ll be in a much better position to handle what actually happens in the market. 
• Importance of Detailed Planning: We provide worksheets based on common Core Offerings to assist in thinking through various Cost Structure categories. Access our Operating Cost Worksheets to facilitate thorough planning.

Strategies and Considerations

• Early-stage Cost Considerations: In the initial phases, certain expenses might be higher. For instance, hiring competent employees from the outset often means paying higher salaries. Similarly, ordering smaller quantities of supplies or products can result in higher per-unit costs.
• Industry Averages as Reference Points: While comparing costs with industry averages can be insightful, it’s important to remember that these may not always be applicable, especially for startups or innovative ventures where the cost dynamics can be quite different.

Special Note: Innovative or New Market Ventures:

• Lean Approach to Fixed and Variable Costs: These businesses often plan operating costs with a lean approach, focusing only on the essentials necessary to reach the next phase of development.
• Understanding Burn Rate Schedules: Particularly in pre-seed or seed rounds, understanding and managing the burn rate – the rate at which a company is spending its capital – is crucial. This schedule helps startups plan how long they can operate before needing additional funding, ensuring that they remain solvent while pursuing growth or development milestones.

A thorough and detailed approach to outlining operating costs not only lays a solid foundation for current operations but also prepares the business for future financial strategies and funding phases. This step is about outlining costs with precision and foresight, setting the stage for sustainable growth and successful funding endeavors.

Welcome to Businessplan.com

Currently in beta test mode.

Products available for purchase are placeholders and no orders will be processed at this time.

Let’s craft the ultimate business planning platform together.

Have questions, suggestions, or want a sneak peek at upcoming tools and resources? Connect with us on X or join “On the Right Foot” on Substack .

This site uses cookies from Google to deliver its services and to analyze traffic.

Ok, Got It.

Privacy Policy

• Grasshopper

Operations Plan

• Lesson Materials Operations Plan Worksheet
• Completion time About 40 minutes

The operations section of your business plan is where you explain – in detail – you company's objectives, goals, procedures, and timeline. An operations plan is helpful for investors, but it's also helpful for you and employees because it pushes you to think about tactics and deadlines.

In the previous course, you outlined your company's strategic plan, which answers questions about your business mission. An operational plan outlines the steps you'll take to complete your business mission.

Your operations plan should be able to answer the following:

• Who – The personnel or departments who are in charge of completing specific tasks.
• What – A description of what each department is responsible for.
• Where – The information on where daily operations will be taking place.
• When –The deadlines for when the tasks and goals are to be completed.
• How much – The cost amount each department needs to complete their tasks.

In this session, we explain each item to include in your operations plan.

Goals and Objectives

The key to an operations plan is having a clear objective and goal everyone is focused on completing. In this section of your plan, you'll clearly state what your company's operational objective is.

Your operational objective is different than your company's overall objective. In Course One , you fleshed out what your strategic objective was. Your operational objective explains how you intend to complete your strategic objective.

In order to create an efficient operational objective, think SMART:

• Specific – Be clear on what you want employees to achieve.
• Measurable – Be able to quantify the goal in order to track progress.
• Attainable & Realistic – It's great to be ambitious but make sure you aren't setting your team up for failure. Create a goal that everyone is motivated to complete with the resources available.
• Timely – Provide a deadline so everyone has a date they are working towards.

Different departments will have different operational objectives. However, each department objective should help the company reach the main objective. In addition, operational objectives change; the objectives aren't intended to be permanents or long term. The timeline should be scheduled with your company's long-term goals in mind.

Let's look at the following example for a local pizza business objective:

• Strategic objective : To deliver pizza all over Eastern Massachusetts.
• Technology department operational objective : To create a mobile app by January 2017 to offer a better user experience.
• Marketing department operational objective : To increase website visitors by 50% by January 2017 by advertising on radio, top local food websites, and print ads.
• Sales department operational objective : To increase delivery sales by 30%, by targeting 3 of Massachusetts's largest counties.

Sales department operational objective: To increase delivery sales by 30%, by targeting 3 of Massachusetts's largest counties.

Production Process

After you create your objectives, you have to think strategically on how you're going to meet them. In order to do this, each department (or team) needs to have all the necessary resources for the production process.

Resources you should think about include the following:

• Suppliers – do you have a supplier (or more) to help you produce your product?
• Technology team: app developing software
• Marketing team: software licenses for website analytical tools
• Sales team: headsets, phone systems or virtual phone system technology
• Cost – what is the budget for each department?

In addition to the production process, you'll also need to describe in detail your operating process. This will demonstrate to investors that you know exactly how you want your business to run on a day-to-day basis.

Items to address include:

• Location – where are employees working? Will you need additional facilities?
• Work hours – will employees have a set schedule or flexible work schedule?
• Personnel – who is in charge of making sure department tasks are completed?

Creating a timeline with milestones is important for your new business. It keeps everyone focused and is a good tracking method for efficiency. For instance, if milestones aren’t being met, you'll know that it's time to re-evaluate your production process or consider new hires.

Below are common milestones new businesses should plan for.

When you completed your Management Plan Worksheet in the previous course, you jotted down which key hires you needed right away and which could wait. Make sure you have a good idea on when you would like those key hires to happen; whether it’s after your company hits a certain revenue amount or once a certain project takes off.

Production Milestones

Production milestones keep business on track. These milestones act as "checkpoints" for your overall department objectives. For instance, if you want to create a new app by the end of the year, product milestones you outline might include a beta roll out, testing, and various version releases.

Other product milestones to keep in mind:

• Design phase
• Product prototype phase
• Product launch
• Version release

Market Milestones

Market milestones are important for tracking efficiency and understanding whether your operations plan is working. For instance, a possible market milestone could be reaching a certain amount of clients or customers after a new product or service is released.

A few other market milestones to consider:

• Gain a certain amount of users/clients by a certain time
• Signing partnerships
• Running a competitive analysis
• Performing a price change evaluation

Financial Milestones

Financial milestones are important for tracking business performance. It's likely that a board of directors or investors will work with you on creating financial milestones. In addition, in startups, it's common that financial milestones are calculated for 12 months.

Typical financial milestones include:

• Funding events
• Revenue and profit goals
• Transaction goals

In summary, your operations plan gives you the chance to show investors you know how you want your business to run. You know who you want to hire, where you want to work, and when you expect projects to be completed.

Download the attached worksheet and start putting your timelines and milestones together on paper.

Talk about this lesson

Examples of Operational Costs

• Small Business
• Running a Business
• Operating a Business
• ')" data-event="social share" data-info="Pinterest" aria-label="Share on Pinterest">
• ')" data-event="social share" data-info="Reddit" aria-label="Share on Reddit">
• ')" data-event="social share" data-info="Flipboard" aria-label="Share on Flipboard">

How to Calculate a Budgeted Profit

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

• Introduction to Corporate Strategy
• How to Estimate Financials for Business Plans

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.

Related Articles

How to forecast profits for a business plan, business financing problems, how much upfront capital for a small business, how to calcuate roi, what are the start up costs & long-term financing options for small businesses, differences between top-line revenue and operating revenue, how to solve profit with cost & revenue, how to eliminate operating segments in accounting, examples of incremental earnings, most popular.

• 1 How to Forecast Profits for a Business Plan
• 2 Business Financing Problems
• 3 How Much Upfront Capital for a Small Business?
• 4 How to Calcuate ROI

• 400+ Sample Business Plans
• WHY UPMETRICS?

Customer Success Stories

Business Plan Course

Strategic Planning Templates

E-books, Guides & More

Entrepreneurs & Small Business

Accelerators & Incubators

Business Consultants & Advisors

Educators & Business Schools

Students & Scholars

AI Business Plan Generator

Financial Forecasting

AI Assistance

Ai Pitch Deck Generator

Strategic Planning

See How Upmetrics Works  →

• Sample Plans

Small Business Tools

How to Write an Operations Plan Section of your Business Plan

Free Operations Plan Template

Ayush Jalan

• December 14, 2023

Your business plan is an elaborate set of instructions stating how to run your business to achieve objectives and goals. Each section describes a part of the process of reaching your desired goal. Similarly, the operations plan section of your business plan explains the production and supply of your product.

An operations plan is formed to turn plans into actions. It uses the information you gathered from the analysis of the market , customers, and competitors mentioned in the previous parts of your business plan and allows for the execution of relevant strategies to achieve desired results.

What Is an Operations Plan?

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

The operations section of your business plan 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.

A well-defined 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?

How to Write an Operations Plan Section?

Creating an operational plan has two major stages, both addressing different aspects of your company. The first stage includes the work that has been done so far, whereas the second stage describes it in detail.

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 processes. These are the elements your development section will contain:

Production workflow

: Explain all the steps involved in creating your product. This should be a highly informative, elaborate description of the steps. Here, you also mention any inefficiencies that exist and talk about the actions that need to be taken to tackle them.

Supply chains

Quality control, 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:

Tools and equipment:, special requirements:, raw materials:, productions:, feasibility:, why do you need an operations plan.

An operations plan is essentially an instruction manual about the workings of your business. It offers insight into your business operations. It helps investors assess your credibility and understand the structure of your operations and predict your financial requirements.

An operations plan reflects the real-time application of a business plan.

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 whilst keeping account of deadlines.

The operations plan helps identify and cut the variances between planned and actual performance and makes necessary changes. It helps you visualize how your operations affect revenue and gives you an idea of how and when you need to implement new strategies to maximize profits.

Advantages of Preparing an Operations Plan:

• Offers Clarity: Operational planning, among other things, makes sure that everyone in the audience and team are 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 strategy to follow: productivity rises, and accountability is maintained.
• Sets A Benchmark: It sets a clear goal for everyone about what is the destination of the company and how to reach there.

Operations Plan Essentials

Now that you have understood the contents of an operations plan and how it should be written, you can continue drafting one for your business plan. But before doing so, take a look at these key components you need to remember while creating your operational plan.

• Your operations plan is fundamentally a medium for implementing your strategic plan. Hence, it’s crucial to have a solid strategic plan to write an effective operations plan.
• Focus on setting SMART goals and prioritizing the most important ones. This helps you create a clear and crisp operations plan. Focusing on multiple goals will make your plan complicated and hard to implement.
• To measure your goals, use leading indicators instead of lagging indicators. Leading indicators is a metric that helps you track your progress and predict when you will reach a goal. On the other hand, lagging indicators can only confirm a trend by taking the past as input but cannot predict the accomplishment of a goal.
• It is essential to choose the right Key Performance Indicators (KPIs) . It is a good practice to involve all your teams while you decide your KPIs.
• An operations plan should effectively communicate your goals, metrics, deadlines, and all the processes.

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

Operations plan by a book publishing house

Track and Accomplish Goals With an Operations Plan

Drafting the operations plan section of your business plan can be tricky due to the uncertainties of the business environment and the risks associated with it. Depending on variables like your market analysis, product development, supply chain, etc., the complexity of writing an operations plan will vary.

The core purpose here is to put all the pieces together to create a synergy effect and get the engine of your business running. Create an effective operations plan to convey competence to investors and clarity to employees.

Build your Business Plan Faster

with step-by-step Guidance & AI Assistance.

Frequently Asked Questions

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 on a daily basis 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?

• 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 needs an operations plan to get a better idea of the roadmap they want for their business.

About the Author

Ayush is a writer with an academic background in business and marketing. Being a tech-enthusiast, he likes to keep a sharp eye on the latest tech gadgets and innovations. When he's not working, you can find him writing poetry, gaming, playing the ukulele, catching up with friends, and indulging in creative philosophies.

Related Articles

How to Write a Business Plan Complete Guide

Write Products and Services Section of a Business Plan

How to Prepare a Financial Plan for Startup Business (w/ example)

Reach your goals with accurate planning.

No Risk – Cancel at Any Time – 15 Day Money Back Guarantee

Popular Templates

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

Planning, Startups, Stories

Tim berry on business planning, starting and growing your business, and having a life in the meantime., business plan financials: starting costs.

It’s really important to have an idea of what you need before you start. Continuing with my series on standard business plan financials , startups need to project starting costs. Starting costs set up a starting balance, which is necessary to plan cash flow. And the starting costs are critical to determining whether a startup can bootstrap or needs outside funding. For existing companies that already have financial results, projections start with the expected ending balance of the previous period. But for startups, it’s about starting costs.

Starting costs are essentially the sum of two kinds of spending. You can estimate them both in two simple lists:

• Startup expenses : These are expenses that happen before the beginning of the plan, before the first month of operations. For example, many new companies incur expenses for legal work, logo design, brochures, site selection and improvements, and signage. If there is a business location, then normally the startup pays rent for a month or more before opening. And if employees start receiving compensation before the opening, then those disbursements are also startup expenses.
• Startup assets : Typical startup assets are cash (the money in the bank when the company starts), business or plant equipment, office furniture, vehicles, and starting inventory for stores or manufacturers.

A Simple Starting Costs Example

I’ve used a bicycle store as an example in several posts that are part of this series of standard business plan financials. Here’s a visual in spreadsheet form, of sample starting costs for a hypothetical bicycle store.

Notice that the lists for estimating starting costs, on the left in the illustration above, are matched to another list of starting funding, on the right side of the illustration. Books have to balance, so the initial estimates need to include not just the money you spend, but also where it comes from. In the case above, Garrett had to find $124,500, and you can see that he financed it with Accounts Payable, debt, and investment in various categories.

Another Simple Starting Costs Example

Here is another simple example: the starting costs worksheet that Magda developed for the restaurant I used for a sample sales forecast . Magda’s list includes rent and payroll, the same as in her monthly spending, but here they are included in starting costs because these expenses happen before the launch.

I included rent and payroll because they point out the importance in timing. The difference between these as startup expenses and running expenses is timing, and nothing else. Magda could have chosen to plan startup expenses as a running worksheet on expenses, starting a few months before launch, as in the illustration below. The launch in this case is early January, so the expenses for October through December are startup expenses. I prefer the separate lists, because I like the way the two lists create an estimate of starting costs. But that’s an option.

The LivePlan Alternative

If you’re a LivePlan user, the LivePlan interface assumes this method and has a more intuitive interface than the spreadsheet version I’m showing in this post. For LivePlan, you start your plan when you start spending, regardless of launch date. So the spending you do for rent and salaries and such, before launch, is part of the flow, as above. Also, LivePlan has its own guided way of helping you figure out what assets you need, how much they cost, and how you are going to finance starting costs, to set up your balance. And the LivePlan cash flow estimator will help you decide how much cash you need, so you don’t have to follow the spreadsheet method here (below).

How to Estimate Your Starting Costs

Obviously the goal with starting costs isn’t just to track them, but to estimate them ahead of time so you have a better idea, before you start a new business, of what the financial costs might be. Breaking the items down into a practical list makes the educated guess a lot easier. Ideally, you know the business you want to start, you are already familiar with the industry, so you can do a useful estimate for most of the startup costs from your own experience. If you don’t have enough firsthand knowledge, then you should be talking to people who do. For others, such as insurance, legal costs, or graphic design for logos, call some providers or brokers, and talk to partners; educate those guesses.

Starting Cash is the Hardest and Most Important

How much cash do you need in the bank, as you launch? That’s usually the toughest starting cost question. It’s also prone to misinformation, such as those alleged rules of thumb you can find everywhere, saying you need to have a year’s worth of expenses, or six months’ worth, before you start. It’s not that simple. For most businesses, the startup cash isn’t a matter of what’s ideal, or what some expert says is the rule of thumb – it’s how much money you have, can get, and are willing to risk.

The best way is to do a Projected Cash Flow while leaving the supposed starting cash balance at zero, which shows how much (at least in theory, according to assumptions) the startup really needs in cash to support the business as it grows, before it reaches a monthly cash flow break-even point. Magda did that to determine the $12,000 needed as starting cash for her restaurant. Note how, in the illustration here, the lowest point in cash is slightly less than $12,000:

That low point comes, theoretically, in the third month of the business, March. The low point is $11,609. Obviously that’s just an educated guess, but it’s based on assumptions for sales forecast, expense budget, and important cash flow factors including sales on account and purchasing inventory. So it’s better than a stab in the dark, or some rule of thumb. Just as an example, the total spending with the estimates shown here, the theoretical “year’s worth of spending,” is $182,000 (which you don’t see on the illustration, by the way, but take my word for it). The total for the first six months is $93,000. If Magda sticks to those old formulas, she can’t start the business. She is able to raise enough money, between loans and her savings, to put $12,000 into the starting cash balance. So that’s what she does. Then she launches and continues to have her monthly reviews, and watch the performance of all key indicators very carefully.

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

The quickest way to turn a business idea into a business plan

Fill-in-the-blanks and automatic financials make it easy.

No thanks, I prefer writing 40-page documents.

Discover the world’s #1 plan building software

• Contact sales

Start free trial

Operational Planning: How to Make an Operations Plan

The operations of your business can be defined as the sum of all the daily activities that you and your team execute to create products or services and engage with your customers, among other critical business functions. While organizing these moving parts might sound difficult, it can be easily done by writing a business operational plan. But before we learn how to make one, let’s first understand what’s the relationship between strategic and operational planning.

Operational Planning vs. Strategic Planning

Operational planning and strategic planning are complementary to each other. This is because strategic plans define the business strategy and the long-term goals for your organization, while operational plans define the steps required to achieve them.

Get your free

Operational Plan Template

Use this free Operational Plan Template for Word to manage your projects better.

What Is a Strategic Plan?

A strategic plan is a business document that describes the business goals of a company as well as the high-level actions that will be taken to achieve them over a time period of 1-3 years.

What Is an Operational Plan?

Operational plans map the daily, weekly or monthly business operations that’ll be executed by the department to complete the goals you’ve previously defined in your strategic plan. Operational plans go deeper into explaining your business operations as they explain roles and responsibilities, timelines and the scope of work.

Operational plans work best when an entire department buys in, assigning due dates for tasks, measuring goals for success, reporting on issues and collaborating effectively. They work even better when there’s a platform like ProjectManager , which facilitates communication across departments to ensure that the machine is running smoothly as each team reaches its benchmark. Get started with ProjectManager for free today.

What Is Operational Planning?

Operational planning is the process of turning strategic plans into action plans, which simply means breaking down high-level strategic goals and activities into smaller, actionable steps. The main goal of operational planning is to coordinate different departments and layers of management to ensure the whole organization works towards the same objective, which is achieving the goals set forth in the strategic plan .

How to Make an Operational Plan

There’s no single approach to follow when making an operation plan for your business. However, there’s one golden rule in operations management : your strategic and operational plans must be aligned. Based on that principle, here are seven steps to make an operational plan.

• Map business processes and workflows: What steps need to be taken at the operations level to accomplish long-term strategic goals?
• Set operational-level goals: Describe what operational-level goals contribute to the achievement of larger strategic goals.
• Determine the operational timeline: Is there any time frame for the achievement of the operational plan?
• Define your resource requirements: Estimate what resources are needed for the execution of the operational plan.
• Estimate the operational budget: Based on your resource requirements, estimate costs and define an operational budget.
• Set a hiring plan: Are there any skills gaps that need to be filled in your organization?
• Set key performance indicators: Define metrics and performance tracking procedures to measure your team’s performance.

Free Operational Plan Template

Leverage everything you’ve learned today with our template. This free operational plan template for Word will help you define your budget, timeline, KPIs and more. It’s the perfect first step in organizing and improving your operations. Download it today.

What Should be Included in an Operational Plan?

Your operational plan should describe your business operations as accurately as possible so that internal teams know how the company works and how they can help achieve the larger strategic objectives. Here’s a list of some of the key elements that you’ll need to consider when writing an operational plan.

Executive Summary

An executive summary is a brief document that summarizes the content of larger documents like business plans, strategic plans or operation plans. Their main purpose is to provide a quick overview for busy stakeholders.

Operational Budget

An operational budget is an estimation of the expected operating costs and revenues for a given time period. As with other types of budget, the operational budget defines the amount of money that’s available to acquire raw materials, equipment or anything else that’s needed for business operations.

It’s important to limit your spending to stay below your operational budget, otherwise, your company could run out of resources to execute its normal activities. You can use our free operating budget template for Excel to track your operating costs.

Operational Objectives

It’s essential to align your operational objectives with your strategic objectives. For example, if one of your strategic objectives is to increase sales by 25 percent over the next three years, one possible operational objective would be to hire new sales employees. You should always grab your strategic plan objectives and turn them into one or multiple action items .

Processes & Workflows

Explain the various business processes, workflows and tasks that need to be executed to achieve your operational objectives. Make sure to explain what resources are needed, such as raw materials, equipment or human resources.

Operational Timeline

It’s important to establish a timeline for your operational plan. In most cases, your operational plan will have the same length as your strategic plan, but in some scenarios, you might create multiple operational plans for specific purposes. Not all operational plans are equal, so the length of your operational timeline will depend on the duration of your projects , workflows and processes.

Hiring Plan

Find any skills gap there might be in your team. You might need to hire a couple of individuals or even create new departments in order to execute your business processes .

Quality Assurance and Control

Most companies implement quality assurance and control procedures for a variety of reasons such as customer safety and regulatory compliance. In addition, quality assurance issues can cost your business millions, so establishing quality management protocols is a key step in operational planning.

Key Performance Indicators

It’s important to establish key performance indicators (KPIs) to measure the productivity of your business operations. You can define as many KPIs as needed for all your business processes. For example, you can define KPIs for marketing, sales, product development and other key departments in your company. This can include product launch deadlines, number of manufactured goods, number of customer service cases closed, number of 5-star reviews received, number of customers acquired, revenue increased by a certain percentage and so on.

Risks, Assumptions and Constraints

Note any potential risks, assumptions and time or resource constraints that might affect your business operations.

What Are the Benefits of Operational Planning?

Every plan has a massive effect on all team members involved, and those can be to your company’s benefit or to their detriment. If it’s to their detriment, it’s best to find out as soon as possible so you can modify your operational plan and pivot with ease.

But that’s the whole point of operational planning: you get to see the effect of your operations on the business’s bottom line in real time, or at every benchmark, so you know exactly when to pivot. And with a plan that’s as custom to each department as an operational plan, you know exactly where things go wrong and why.

How ProjectManager Can Help with Operational Planning

Creating and implementing a high-quality operational plan is the best way to ensure that your organization starts out a project on the right foot. ProjectManager has award-winning project management tools to help you craft and execute such a plan.

Gantt charts are essential to create and monitor operational plans effectively. ProjectManager helps you access your Gantt chart online so you can add benchmarks for operational performance reviews. You can also create tasks along with dependencies to make the operation a surefire success.

Whether you’re a team of IT system administrators, marketing experts, or engineers, ProjectManager includes robust planning and reporting tools. Plan in sprints, assign due dates, collaborate with team members and track everything with just the click of a button. Plus, we have numerous ready-made project reports that can be generated instantly, including status reports, variance reports, timesheet reports and more.

Related Operations Management Content

• Operational Strategy: A Quick Guide
• Operations Management: Key Functions, Roles and Skills
• Operational Efficiency: A Quick Guide
• Using Operational Excellence to Be More Productive

Operational planning isn’t done in a silo, and it doesn’t work without the full weight of the team backing it up. Ensure that your department is successful at each benchmark. ProjectManager is an award-winning pm software dedicated to helping businesses smooth out their operational plans for a better year ahead. Sign up for our free 30-day trial today.

Deliver your projects on time and under budget

Start planning your projects.

Average cost of starting a small business

Advertiser disclosure.

We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.

Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.

How We Make Money

The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.

• Share this article on Facebook Facebook
• Share this article on Twitter Twitter
• Share this article on LinkedIn Linkedin
• Share this article via email Email

• • Personal finance for women
• • Debt management and credit-building

• • Credit cards
• • Rewards credit cards
• Connect with Erica Sandberg on Twitter Twitter
• Connect with Erica Sandberg on LinkedIn Linkedin

• • Personal loans
• • Auto loans
• Connect with Pippin Wilbers on LinkedIn Linkedin
• Get in contact with Pippin Wilbers via Email Email

The Bankrate promise

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity , this post may contain references to products from our partners. Here's an explanation for how we make money .

Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.

Bankrate follows a strict editorial policy , so you can trust that we’re putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts , who ensure everything we publish is objective, accurate and trustworthy.

Our banking reporters and editors focus on the points consumers care about most — the best banks, latest rates, different types of accounts, money-saving tips and more — so you can feel confident as you’re managing your money.

Editorial integrity

Bankrate follows a strict editorial policy , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.

Key Principles

We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.

Editorial Independence

Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information.

How we make money

You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey.

Bankrate follows a strict editorial policy , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.

We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money.

Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service.

Launching a small business almost always involves an initial investment. How much startup funding you need depends on many factors, such as your industry, the products or services or the store location. The cheapest businesses to start may cost as little as $12,000 initially, but other businesses like restaurants can run from $400,000 or more.

The best way to determine your startup costs is to list all expected expenses and the dollar amount for each item. Let’s drill down into the exact dollar amounts to start your business and the types of costs you may encounter.

Key small business cost statistics

• On average, small business owners spend $40,000 in their first full year. ( Shopify )
• The least expensive cost is the incorporation fee, which is around $145, while the most expensive can be equipment, typically $11,000 to $125,000. ( Forbes Advisor )
• 76% of startups without employees used personal funds to finance their business ( Fed Small Business )
• The top financial challenges for nonemployer startups are inflation as well as meeting operating expenses. ( Fed Small Business )
• Average hourly pay for an administrative assistant is $22. ( Salary )
• Average cost to build a website is $200 and costs $50 monthly for maintenance. ( WebsiteBuilderExpert )
• Average cost of adding a new employee to your payroll usually ranges from $4,000 to $20,000. These costs don’t factor in the employee’s salary and benefits. ( Indeed )

How much does it cost to start a small business?

Industry averages can help give you a general idea of how much you can expect to spend when starting a small business. As your business grows, you’ll need to be strategic about keeping costs low and opting for the most affordable materials.

By keeping costs low, you’ll see the biggest returns on your investment from business products and services. Your actual costs will vary depending on:

• Size of your business
• Physical or online location
• Number of employees
• Cost of inventory needed
• Cost to produce goods, such a labor and raw materials

Online business vs. brick-and-mortar stores

Whether you have a physical location or an online-only presence will play a significant role in your business overhead costs. For example, an online store could cost you around $2,000 to $20,000 to build, based on Shopify data . That range estimates the cost of hosting and designing a custom e-commerce site. The exact cost may be different if you have a leaner or more robust business model.

Your location can also influence small business costs. The 2021 Business Cost Index by Approve found Texas, Oklahoma, and Kentucky are the three cheapest states to run a business. California, New Jersey, and Vermont are the most expensive.

Employee payroll or contractor services

Employees are another big expenditure. According to the Bureau of Labor Statistics , the average non-government employee costs your business $41.03 to $43.26 per hour.

Given that there are 2,080 working hours in a year, the average employee may cost you roughly $85,000 to $90,000 per year, based on the Bureau of Labor Statistics wage. So if you have five employees, you’ll have to project for $425,000 to $450,000 in costs.

Another way to calculate total employee costs is to budget for their salary, employee benefits and taxes. The Small Business Administration suggests estimating employee costs to be 1.25 to 1.4 times their salary. Using that information, an employee with a $50,000 annual salary would cost you between $62,500 and $70,000.

Average cost by industry

Your average startup costs will vary greatly depending on the field or industry you’re hoping to tap into. Your industry will determine your entire business model, your inventory needs, your marketing strategy and your costs to produce your goods or services. Here’s a closer look at a few industry averages:

Types of costs for your small business

While it’s possible to fund your business with little-to-no upfront costs , you will likely encounter many expenses along the way. You’ll want to gauge whether your costs are essential to running your business or an expense that you can hold off until the business is established.

Essential costs vs. optional costs

Although there are some expenses you can do without or delay, others are unavoidable right from the start. In general, they include expenses such as:

Common essential costs

Common optional costs.

• New, rather than used or leased, equipment
• Extra office space
• Luxurious business trips and entertaining
• Social media influencers
• A CPA when you can use accounting software instead
• Excess inventory

Fixed costs vs. variable costs

You will find that some of your expenses won’t change from month to month. Others will vary, coming up once or occasionally throughout the year. To ensure that you have enough funds to cover all of your necessary fixed and variable costs, plan ahead.

Common fixed costs

• Insurance premiums
• Property tax
• Essential workers salaries
• Internet and cell phone bills
• Loan payments

Common variable costs

• Packaging and shipping
• Raw materials
• Commissions
• Credit card payments and interest
• Consultants

Average small business costs

Whether you’re starting from scratch or expanding your business, you want to get detailed about the business costs and amount you expect to spend. Having an organized business budget can help you plan for these costs and account for any revenue changes that come your way. Here’s a look at how much you can expect to spend on your fixed and variable costs.

Average fixed costs

When adding up business costs, don’t forget depreciation, which is the value that your physical business assets lose over time due to age or use. You want to include this cost because it affects your business’s overall net worth when comparing its assets versus liabilities .

Average variable costs

How to save on costs and fund your startup.

Businesses can save on startup costs by paring back business expenses to free up extra revenue, or they may opt for a business loan .

Consider trimming your overhead to make your start-up costs manageable. Starting an online business is one way to reduce or eliminate office space and insurance costs and save a little extra while you’re getting your business off the ground. Yet any business can take a hard look at business expenses and cut costs that aren’t necessary to the business’s immediate success.

Business owners can also apply for a startup loan that provides the on-hand cash needed to make products or expand operations. Many business owners take advantage of low-interest Small Business Administration (SBA) loan s or business loans that come from a traditional bank or online lender.

Finally, consider applying for a business credit card to help you cover your costs. Business credit cards typically have fewer eligibility requirements, focusing on your personal credit score when you apply. A business credit card also gives you the benefit of no interest charges if you pay in full regularly. You will get charged interest if you make the minimum payment or go past the payment due date.

Frequently asked questions

How do you calculate start-up costs, what do i need before starting to spend money on a start-up business, what are additional considerations, how do i start a small business.

Article sources

We use primary sources to support our work. Bankrate’s authors, reporters and editors are subject-matter experts who thoroughly fact-check editorial content to ensure the information you’re reading is accurate, timely and relevant.

“ How Much Does It Cost To Start a Business? (Research). ” Shopify. Accessed on October 20, 2023.

“ Business Startup Costs: How To Calculate And Budget. ” Forbes Advisor. Accessed on October 20, 2023.

“ 2023 Report on Nonemployer Firms: Finding from the 2022 Small Business Credit Survey. ” Fed Small Business. Accessed on October 20, 2023.

“ Administrative Assistant II Salary in the United States. ” Salary.com. Accessed on October 20, 2023.

“ How Much Does a Website Cost in 2023? ” WebsiteBuilderExpert. Accessed on October 20, 2023.

“ What Is the Cost of Hiring New Employees? ” Indeed. Accessed on October 20, 2023.

“ The Cost of Building an Ecommerce Website: 2023 Guide. ” Shopify. Accessed on October 20, 2023.

“ The 2021 Business Cost Index. ” Tipalti Approve. Accessed on October 20, 2023.

“ Employer Costs For Employee Compensation—June 2023. ” Bureau of Labor Statistics. Accessed on October 20, 2023.

“ How Much Does an Employee Cost You? ” U.S. Small Business Administration. Accessed on October 20, 2023.

“ How Much Does it Cost to Open a Restaurant? ” Restaurant Owner.com. Accessed on October 20, 2023.

“ How Much Does It Cost To Start A Construction Company? (In 2023). ” Starter Story. Accessed on October 20, 2023.

“ How Much Does It Cost To Open a Retail Store? ” Korona POS. Accessed on October 20, 2023.

“ How Much Does It Cost To Start An Art Business? (In 2023). ” Starter Story. Accessed on October 20, 2023.

“ How Much Does It Cost To Start An Entertainment Information Business? (In 2023). ” Starter Story. Accessed on October 20, 2023.

“ How much do small businesses pay in taxes? ” Nationwide. Accessed on October 20, 2023.

“ How much does small business insurance cost? ” Insureon. Accessed on October 20, 2023.

“ How to Create a Marketing Budget for a Small Business. ” Salesforce. Accessed on October 20, 2023.

“ What are the general costs of incorporating? ” Legal Zoom. Accessed on October 20, 2023.

“ How Much Do Y’all Spend on Packaging Materials Per Order? ” Esty Community. Accessed on October 20, 2023.

“ Average Electric Bill For Businesses In the US. ” Integrity Energy. Accessed on October 20, 2023.

“ Flat Rate Shipping — UPS Simple Rate. ” UPS. Accessed on October 20, 2023.

“ 9 Sales Commissions Structures (With Formulas and Examples). ” Indeed. Accessed on October 20, 2023.

“ The Average Cost Per Month for Office Supplies. ” Hearst Newspapers. Accessed on October 20, 2023.

“ Daily business tourism expenses in the United States 2018–2021. ” Lopez, Ana M. Accessed on October 20, 2023.

“ Small Business Development Centers. ” U.S. Small Business Administration. Accessed on October 20, 2023.

Related Articles

What is the average small business loan amount?

How much does the average small business owner make?

How much can you borrow with a startup business loan?

How to start a small business

More From Forbes

Cut costs, not corners: proven strategies to keep your business lean.

• Share to Facebook
• Share to Twitter
• Share to Linkedin

James Webster, Executive Chairman, ROK Financial .

When it comes to overall business health, growth and efficiency tend to be two of the key factors that many business owners will evaluate to measure success. Even a successful business can spiral quickly if not focusing on the most important health: its financial health. There’s an intricate relationship between cutting costs and maintaining the level of service you want to provide in your business.

What Makes A Business Lean?

A lean business can be identified as one that operates with the goals of maximizing profit, productivity and consumer value while minimizing expenses, overhead costs and negative effects on quality. A lean business strategically uses its resources to its advantage and doesn’t overproduce (or underdeliver). They have a good grasp on their finances and know how to keep their goals aligned with their budget. Most importantly, they know the main focus of their business and can prioritize budget allocation accordingly.

How Can I Run A Lean Business?

Keeping your business lean entails focusing on your core objectives, and then finding inventive ways to meet them while staying within your financial constraints. There are many ways to successfully run a lean business, allowing you to deliver value to your customers while simultaneously limiting unnecessary use of funds.

Here are five ways to efficiently cut costs for a lean business:

1. Limit overhead costs.

Netflix: marvel dud among movies new on streaming service this week, houston rockets land third pack in upcoming nba draft, northern lights might be visible again tonight here s the updated aurora forecast.

Discover practical ways to reduce costs that are frequently associated with day-to-day operations. This can be done by allocating tasks in-house to limit outsourcing work, negotiating favorable deals with vendors and suppliers and implementing strategic inventory management to avoid overstocking.

2. Streamline operations.

Optimize your business’s efficiency and workflow by improving operational procedures. This is most frequently done in today’s world by utilizing automation or technology integration to reduce repetitive tasks, avoid the possibility of user error and allow employees to focus on core assignments.

3. Invest in tech the right way.

Strategically invest in software and technology alternatives that can increase productivity while staying within your allocated budget. This is a great way to adopt new and improved solutions for company efficiency and communication and simultaneously helps you stay competitive and up to date with industry trends.

4. Use budget-friendly marketing.

Opt for cost-effective marketing tactics that will increase exposure and brand awareness without breaking the bank. You can maximize your marketing efforts through outlets such as social media, search engine optimization (SEO) and participating in local community events.

5. Maximize profit margins.

Potentially the most important of all is learning how to implement pricing strategies that will maximize your profit margins and increase overall revenue. It is essential for business sustainability that you understand your niche market and how your costs versus offerings can hold up with consumer trends.

Embracing Lean Principles

I once worked with a manufacturing company that hit the ground running and came to success shortly after its inception. They had great customer flow, operating multiple production lines and increasing their product offerings regularly to keep up with demand.

However, just as quickly as they rose to the top, they found themselves face-to-face with burnout and began facing challenges that put them in a profitability rut. They began to over-stock inventory, produce way too many units before the demand called for it and hindered relationships with their suppliers due to inconsistent quality. When the company began to see a downward spike in revenue, they were forced to pull back on marketing efforts, downsize the production line and even let a few employees go to reduce overhead costs.

Fast-forward, and this company is not only surviving but once again thriving. How did they do it? They became lean . They reduced inventory levels in order to improve supply management. They began to produce units on an as-needed basis, freeing up space in their warehouses and reducing product holding costs. And over time, they restored trust with their customers and vendors who had begun to fall off due to inconsistent delivery times and quality standards.

Not Cutting Corners

As we've seen, a few of the key elements in this discussion include efficiency, productivity and improvement. When making crucial changes to your business and its operations, those words need to stay top of mind. In times of trouble, cutting costs may seem like an immediate switch that needs to be flipped, but you need to look beyond the short-term focus and keep your long-term goals in mind. Here are a few indicators that your new business tactics aren’t working in your favor.

Quality And Compliance

Are you saving costs at the expense of quality? Implementing strategies such as downgrading supplies, eliminating staff and overworking those who remain and working around product or service regulations can result in compliance and satisfaction issues.

Surfacing Hidden Costs

Saving costs in one area of your business may inadvertently increase costs in another. Make sure you’re looking at the whole picture and keep an eye on your business’s overall finances when implementing large budget adjustments.

Lack Of Strategy

Don’t lose sight of your core values. Business strategy should improve when cutting costs, not decrease. If your long-term objectives don’t align with your short-term fixes, you may find yourself derailing.

Employee Satisfaction

Your employees are at the forefront of your company and often can provide valuable input on the day-to-day running of your business. Consider consulting them when making operational changes that may directly affect their roles.

Consumer Experience

If you begin to see an uptick in product returns, poor reviews or customer complaints, you may want to consider reevaluating any changes you’ve recently made that directly affected the quality of your products and services before you lose customer trust and market share.

Final Words On Achieving Success

Every business will find itself going down a unique path when it comes to switching over to lean tactics. First, one must have a strong understanding of their business and what exactly is making it unsustainable. By assessing current processes, brainstorming potential solutions and swiftly acting to implement them, a business can reach its full potential while uncovering new opportunities for growth and innovation.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?

• Editorial Standards
• Reprints & Permissions

• Share full article

For more audio journalism and storytelling, download New York Times Audio , a new iOS app available for news subscribers.

• May 13, 2024   •   27:46 How Biden Adopted Trump’s Trade War With China
• May 10, 2024   •   27:42 Stormy Daniels Takes the Stand
• May 9, 2024   •   34:42 One Strongman, One Billion Voters, and the Future of India
• May 8, 2024   •   28:28 A Plan to Remake the Middle East
• May 7, 2024   •   27:43 How Changing Ocean Temperatures Could Upend Life on Earth
• May 6, 2024   •   29:23 R.F.K. Jr.’s Battle to Get on the Ballot
• May 3, 2024   •   25:33 The Protesters and the President
• May 2, 2024   •   29:13 Biden Loosens Up on Weed
• May 1, 2024   •   35:16 The New Abortion Fight Before the Supreme Court
• April 30, 2024   •   27:40 The Secret Push That Could Ban TikTok
• April 29, 2024   •   47:53 Trump 2.0: What a Second Trump Presidency Would Bring
• April 26, 2024   •   21:50 Harvey Weinstein Conviction Thrown Out

Stormy Daniels Takes the Stand

The porn star testified for eight hours at donald trump’s hush-money trial. this is how it went..

Hosted by Michael Barbaro

Featuring Jonah E. Bromwich

Produced by Olivia Natt and Michael Simon Johnson

Edited by Lexie Diao

With Paige Cowett

Original music by Will Reid and Marion Lozano

Engineered by Alyssa Moxley

Listen and follow The Daily Apple Podcasts | Spotify | Amazon Music | YouTube

This episode contains descriptions of an alleged sexual liaison.

What happened when Stormy Daniels took the stand for eight hours in the first criminal trial of former President Donald J. Trump?

Jonah Bromwich, one of the lead reporters covering the trial for The Times, was in the room.

On today’s episode

Jonah E. Bromwich , who covers criminal justice in New York for The New York Times.

Background reading

In a second day of cross-examination, Stormy Daniels resisted the implication she had tried to shake down Donald J. Trump by selling her story of a sexual liaison.

Here are six takeaways from Ms. Daniels’s earlier testimony.

There are a lot of ways to listen to The Daily. Here’s how.

We aim to make transcripts available the next workday after an episode’s publication. You can find them at the top of the page.

The Daily is made by Rachel Quester, Lynsea Garrison, Clare Toeniskoetter, Paige Cowett, Michael Simon Johnson, Brad Fisher, Chris Wood, Jessica Cheung, Stella Tan, Alexandra Leigh Young, Lisa Chow, Eric Krupke, Marc Georges, Luke Vander Ploeg, M.J. Davis Lin, Dan Powell, Sydney Harper, Mike Benoist, Liz O. Baylen, Asthaa Chaturvedi, Rachelle Bonja, Diana Nguyen, Marion Lozano, Corey Schreppel, Rob Szypko, Elisheba Ittoop, Mooj Zadie, Patricia Willens, Rowan Niemisto, Jody Becker, Rikki Novetsky, John Ketchum, Nina Feldman, Will Reid, Carlos Prieto, Ben Calhoun, Susan Lee, Lexie Diao, Mary Wilson, Alex Stern, Dan Farrell, Sophia Lanman, Shannon Lin, Diane Wong, Devon Taylor, Alyssa Moxley, Summer Thomad, Olivia Natt, Daniel Ramirez and Brendan Klinkenberg.

Our theme music is by Jim Brunberg and Ben Landsverk of Wonderly. Special thanks to Sam Dolnick, Paula Szuchman, Lisa Tobin, Larissa Anderson, Julia Simon, Sofia Milan, Mahima Chablani, Elizabeth Davis-Moorer, Jeffrey Miranda, Renan Borelli, Maddy Masiello, Isabella Anderson and Nina Lassam.

Jonah E. Bromwich covers criminal justice in New York, with a focus on the Manhattan district attorney’s office and state criminal courts in Manhattan. More about Jonah E. Bromwich

Advertisement