![]() This is an expense control issue that needs to be investigated, as there may be important inflationary increases in specific expenses like wages or payroll. The real revenue increased 2% (taking the expense increase out of the revenue increase) so we can say there was a potential expense control issue of around 75% (the ratio of real revenue to operating expenses). We’ll take a company with a nominal dollar increase in revenues of 10% and operating expenses up 8%. Only real revenue dollar changes are what actually affect the operating expenses. It’s important to note that the real revenue dollar increase is more important than the absolute dollar increase. Shifting expense items back and forth between a direct expense and an operating expense to make one or the other look good harms a business in the long run.Įxpense control is used either as a percentage of revenues or an absolute dollar increase compared to the absolute dollar increase in revenues for the period being measured. ![]() In order to track operating expenses effectively, it is important that all expenses are properly allocated. There are two problems with this thinking: In good times, expense control is viewed as unnecessary in light of increasing revenues and net income. It’s commonly thought that operating expense control happens out of necessity, not as an on-going business practice. They are considered the continuous financial obligations incurred in the daily operation of the business. Your operating expense control can make a huge difference in your gross profit margin. Operating expenses are expenses other than your costs of goods sold, direct expenses, other income or other expenses.
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