By its definition, cost of doing business accounts for all the expenses incurred by a firm or individual in producing and selling goods or services for a profit.

According to Investopedia, business expenses are costs incurred in the ordinary course of business. They can apply to small entities or large corporations. Business expenses are part of the income statement. On the income statement, business expenses are subtracted from revenue to arrive at a company’s taxable net income.

Costs must be considered carefully by managers, business owners, and anyone involved in running a company, since the amount of such costs will play a large role in determining if a company is profitable or not.

Calculating the Cost of Doing Business

Cost of doing business depends on many factors, including the price of services and goods, compliance with regulations, and interest rates for taxes and borrowed funds. The lower a business’s overall cost, the easier it will be for it to operate, pay taxes, and hire employees, if necessary.

It can be a challenge for owners and managers to identify their total cost of operation and find ways to control them. However, this insight can be especially valuable when attempting to optimize expenses and set a business budget for upcoming quarters.

Tracking the cost of doing business is helpful in any industry as this information gives businesses a clearer understanding of their spending habits, as well as pinpointing areas where costs can be minimized.

By determining the optimal level of expenses for every aspect of the business, such as labor, inventory, marketing, etc. companies can maximize profits.

However, it’s important to remember that certain aspects of business finance also generate revenue.

Costs, like marketing and advertising, for example, can result in large returns on investment (ROI), making it a good idea to increase spending in these areas to increase sales. For example, a Nielsen report found that the average return on advertising spend (ROAS) is $2.78 for every $1.00 spent.

With startups, the general formula for calculating total operating costs still applies. However, since there are no income statements to work with, startup founders will have to make educated guesses to estimate their expenses.

When calculating the cost of doing business for startups, consider the following steps.

Direct and Indirect Costs

Direct costs are expenses that can be directly linked to the production or delivery of goods and services. It’s for this reason that many variable costs can also be considered as direct costs. Examples of direct costs include raw materials, manufacturing equipment, and wages of production staff.

However, certain fixed costs, like the cost of renting a manufacturing facility, can also be tied to production.

In contrast, indirect business costs are tied to multiple business activities not necessarily related to production. These can include general office expenses, administrative salaries, rent, and utilities.