Operating expenses are a necessary component of running every business. Understanding how much money is required to keep a company running is critical to ensure its vitality and continuity. Additionally, controlling operating expenses is a factor in remaining competitive. As Sam Walton, founder of Walmart stated, “Control your expenses better than your competition. This is where you can always find the competitive advantage.” Thus, it is both wise and necessary to forecast your operating expenses to improve profitability and generate business growth. 

What Are Operating Expenses 

Operating expenses are the costs directly related to the day-to-day activities of every business. Operating expenses include employee wages, benefits and payroll taxes, business-related travel, office supplies, rent, maintenance and repairs, utilities, insurance, property tax, inventory, marketing, and advertising costs.

Why it is Important to Forecast Your Operating Expenses 

Expense forecasting is critical to achieving and maintaining business profitability. As Professor Paul Saffo said, “The goal of forecasting is not to predict the future but to tell what you need to know to take meaningful action in the present.” Forecasting is a tool that smart business leaders use to set and meet goals and to control and manage costs to achieve ongoing profitability. 

It is important to forecast your operating expenses to provide a roadmap for the business’s financial activities. Financial forecasting leads to better decision-making. It contributes to better debt management. It helps to prevent cash shortages. It demonstrates creditworthiness. It improves the management of seasonal business fluctuations. And it can provide an early warning system for potential problems. Good financial forecasting reduces financial risk and improves disaster recovery, thus creating a more stable operating environment. It facilitates planned and consistent growth.                           

How to Forecast Your Operating Expenses 

Key elements to include when you forecast your operating expenses are: 

Historical data. A careful review of historical data is the best starting point for making good future projections.  

Best/worst scenarios and risk analysis.  Your planning should involve creative thinking about possible future impacts on your business, including disasters and higher-than-expected revenues. 

Financial documents. Critical documents to use in analyzing your business and reporting your financial condition include the income statement, the balance sheet, and the cash flow statement. 

Follow these seven steps to forecast your operating expenses: 

  1. Define the purpose of your forecast in terms of what you expect to learn and its expected impact. 
  2. Choose the time frame for your forecast. Clearly, forecasting is more accurate in the short term than in the long term because business and market conditions change. 
  3. Gather past financial statements and historical data for all your cost categories so you can dig deep. 
  4. Include qualitative considerations from your management team and outside sources, such as your lawyer, CPA, banker, and other key stakeholders. 
  5. Consider any obstacles that can impede better expense control. 
  6. Consider any expense risks and opportunities on the horizon. 
  7. Document the forecast and then monitor the results.                               

Expense Forecasting Mistakes to Avoid 

When you forecast your operating expenses, avoid the mistakes of using outdated data, overlooking seasonality, ignoring external factors, failing to communicate or collaborate in the forecasting process, and being too optimistic or pessimistic.

Seek Professional Business Coaching Assistance 

Contact Blue Diamond Consultants for coaching services that are based on extensive experience through previous success for home service businesses.