Operating Costs

Operating expenses are the costs a company incurs in order to conduct its day-to-day business. These are costs that are not directly related to the production of a product but are necessary for the company to function. Operating expenses affect the company’s operating profit (EBIT) and are therefore a key element in financial statement analysis.

What do operating costs include?

Operating costs typically include expenses such as:

salaries for administrative staff and non-production employees
rent, electricity, heat, and other utility costs
Marketing and Sales
IT, Software, and Operating Systems
insurance
Office Supplies and Administration
repair and maintenance
costs incurred for service or support

Operating costs are fixed or semi-variable and are not directly affected by how much the company produces or sells.

Operating Costs vs. Variable Costs

It is important to distinguish between:

variable costs – vary in line with production (e.g., raw materials, shipping, commissions),
Operating costs (fixed costs) – must be paid regardless of sales volume.

Operating expenses are always listed after cost of goods sold/production costs in the income statement.

How to Report Operating Expenses in the Financial Statements

Operating expenses are directly included in the calculation of the company's operatingprofit (EBIT):
Revenue – Cost of Goods Sold – Operating Expenses = Operating Profit (EBIT)

If operating costs rise without a corresponding increase in revenue, operating income will decline—and with it, the company’s profitability.

Examples

A company has:

Revenue: 10,000,000 DKK
Cost of Goods Sold: 4,000,000 DKK
Operating costs: 3,500,000 DKK

EBIT = 10,000,000 – 4,000,000 – 3,500,000 = 2,500,000 DKK

Explain how operating costs significantly affect the bottom line.

Why are operating costs important?

Operating costs provide insight into:

how effectively the company manages its operations
whether the costs are at a sustainable level
how much needs to be sold before the business turns a profit

High operating costs can result from an inefficient structure, excessively high fixed costs, or poor capacity utilization.

How can operating costs be reduced?

Companies often implement the following measures:

digitization and automation of processes
outsourcing of non-critical functions
reduction in facility costs
optimization of administrative procedures
investment in systems that reduce manual processing

Even small reductions can have a significant impact on EBIT—and thus on the company's financial performance.

Operating Costs and Qatchr

In Qatchr—Collectia’s platform for credit reports and accounting data—you can see the impact of operating costs through key metrics such as:

gross profit
earnings before interest and taxes (EBIT)
profit before tax
personnel expenses
depreciation and write-downs

Although operating expenses are not shown as a single figure, their impact is clearly evident in the trend in operating income and the company’s profit margin. These figures help you assess the stability, efficiency, and risk associated with customers and business partners.