Understanding Operational Cost and Management

5 min readAug 28, 2020

Hey there! TallyDekho is back with some interesting blend of two crucial elements that are needed in an organization to maintain productivity level, i.e, operational cost, and its effective management. We know that no business can run without funds and that’s why various types of costs are incurred and operational cost is one of the most important ones. So, in today’s blog, we’ll discuss what is operational cost and how it can be managed efficiently in business.

What is Operational Cost?

In every business, whether it’s small-scale or large-scale, the cost is the inevitable part. But some costs are non-recurring in nature and are incurred not very frequently; whereas, there are some other costs that a business needs to incur on a daily basis to run day-to-day operations and also to have proper maintenance and administration. Such costs are operating costs.

Well, there are certain expenses that the category of operational cost consists of. Below are some of them:

  • Cost of goods sold (Production cost) Also known as the cost of revenue from operations
  • Labor costs
  • Sales costs to induce more sales
  • Depreciation of the fixed assets
  • Amortization expenses
  • Administration costs
  • Maintenance costs
  • Other related costs that are directly related to the production function

Therefore, those costs that are incurred on a daily basis to run daily operations and day-to-day maintenance and administration in the business are known as operating costs. These costs add direct value to the business goods or services as they are direct by nature.

Why is it needed?

  • To minimize costs incurred at the operational or production level
  • To delegate the responsibilities and create accountability
  • To give the idea to the workers about the budget
  • To bring a more productive outline to estimate operating income
  • To evaluate operating expenses and their respective ratios
  • To create a balance between operating cost and revenue

Factors affecting the operational cost of the concern

The operating costs that incur vary from business to business and there are certain factors that affect the operational cost structure of concern. Let’s see some of them.

• Extent of global competition

The very first factor that affects the operating cost is the extent of global competition the business caters to in the market. If the competition is high, then the costs chart will go up and vice versa.

• Type of business operations and cost challenges

The other important factor is the type of business operations taking place as the cost structure can vary with the scale of operations and cost challenges that the operational team comes across.

• Integration capacity of advanced technologies

A business that gets easy adaptation to the advanced technologies is more likely to sustain and they incur comparatively low operating costs as compared to the businesses who go for old and outdated technologies. However, adopting new technology can be costlier in the beginning but it will gradually result in the overall minimization of the operating cost of the business.

• Availability of raw materials for operations

This is another vital factor that directly affects the operating cost structure of the organization. If the raw materials are easily available for production, it reduces the cost, on the other hand, if the raw materials are not easily available, it will bring the cost up.

• Estimate the sales target and sales productivity

The next crucial factor is understanding the sales target and the productivity level that managers wish to attain. It brings the cost down making the operations quite economical.

How can operational costs be managed?

Well, managing costs has always been a challenging task for any entity as there are certain factors that influence the cost structure. Thus, operational costs are incurred to make the production happen. Below are some ways that a manager should follow to revise and regulate the operating cost of the business.

Integrate technologies that promote efficiency

Yes, if you integrate the technologies that are newly developed into your business, it initially can be expensive to you, but gradually it will make your overall operational cost structure very economical.

Outsource the operations if possible

There are some operations that are not so frequent to happen, so try to outsource that function and avoid unnecessary hiring of the workers. It will help you in cutting labor costs as well.

Pay invoices early and avail the discount offers

Most suppliers follow the policy to give discounts to clients who pay early without any delay. It brings your cost down and you finish up by a timely meeting of your payment obligations.

Try to cut short the unnecessary tasks to reduce inefficiencies

There are numerous tasks that make up the production function. Some tasks are unavoidable and some are. So, the manager should filter out unnecessary tasks and reduce the cost this way.

Regular follow-up is important

Even if you go well, don’t forget to regularly follow-up and compare what you planned and what is the actual outcome. Frequent follow-up will help you in understanding where you’re becoming extravagant and thereby, you would be able to envisage a strategy to reduce and regulate operational costs accordingly.

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