What Are Net Operating Expenses?

Net operating expenses are the sum total of all costs associated with operating a business, corporation, or commercial enterprise. In the business and finance worlds, the word “net” essentially means “total” or “overall.” There is usually but one requirement for a cost to be considered a net operating cost, which is that it be related to actually operating the business, rather than connected with the sale or manufacture of a product.

Businesses calculate their net operating expenses as a way of anticipating their total costs over a certain span of time, usually a year. It can be very difficult to keep a balanced budget without some sense of how much money has to go out just to stay afloat. Estimating net operating expenses in advance helps companies make sound spending decisions and often increase overall profit margins.

The most essential characteristic of a net operating expense is that it be linked specifically to some cost associated with running a business. Any rent or property taxes fit within this description, as do the costs of supplies, utilities, and basic services like telephone and Internet. Payroll expenses and employee benefits also qualify.

Things get murkier where production and manufacturing are concerned. Costs that are directly associated with producing something that is sold to the public are not operating expenses. Most of the time, these are categorized as sales expenses or general expenses. Sales commission expenses, labor costs, and the price of marketing or advertising usually fall within this category.

From one perspective, costs in both the operating and sales categories are outputs, so should be considered together. Most businesses do, in fact, consider totals from each column together when looking at overall expenditures. Keeping them separate at the outset can be beneficial for a number of reasons, however, first of which is ease of accounting and budgeting.

Most of the time, a company decides how much money it can afford to allocate to sales expenditures by first calculating how much it costs to actually be in business in the first place. By critically examining net operating expenses, corporate leaders are able to make good choices when it comes to setting aside money for promotion and production. Sales can always be trimmed back, but that same flexibility may not apply to basic operating expenses.

Taxes are another reason why many businesses assess net operating expenses independent of other expenses incurred. In many countries, business owners can deduct operating costs from their total taxes owed. This benefit is usually limited to costs that relate specifically to staying operational. Deducted business expenses must generally be calculated exactly, and must be adjusted to relate only to the tax year in question.