What Is an Operating Expense in E-Commerce?

Operating expenses are necessary for running any business. From rent to marketing and employee wages, every cost is crucial to keep the wheels of your business turning.

However, in ecommerce businesses, where margins are thin and competition fierce, keeping operating expenses under control is vital for sustainable growth.

With doola Bookkeeping software, you can streamline expense tracking, identify cost-saving opportunities, and ensure compliance with regulations, all while saving time and effort.

That’s not all! Our all-in-one accounting services have everything you need to prepare your books for tax returns and simplify tax filing. 

Our experts will also help you identify deductions and credits to reduce your tax bills so you can save more dollars to reinvest in scaling operations or improving customer experiences. 

So, let’s break down an operating expense in e-commerce with clarity and insight, so you can optimize costs and maximize profits!

What Are Operating Expenses in E-Commerce?

Operating expenses, or OpEx, are the necessary expenditures required to keep an online store up and running. These expenses can vary from business to business depending on its size, operational model, and niche.

Unlike COGS, which is directly tied to producing sold goods or services, OpEx covers administrative costs to keep the business’s day-to-day operations running smoothly. 

So, once you get to the bottom of these expenses, you can craft strategies to control and optimize their spending. 

For instance, you can implement energy-efficient practices to reduce utility bills or negotiate better terms with suppliers to lower administrative costs.

However, in the case of ecommerce businesses, these costs are quite different from what you witness in a traditional business. While retail businesses have store maintenance, ecommerce businesses have website maintenance. 

This includes costs for domain registration, web hosting services, website development and design updates, and any plugins or apps used to enhance the website’s overall functionality.

Types of Operating Expenses in E-Commerce

OpEx can be divided into various categories, each with unique characteristics and different ways of influencing a business’s financial strategy.

Understanding the distinctions between them can help you tailor your expense management and craft a comprehensive financial plan.

• Fixed Expenses: These refer to costs that remain constant regardless of sales volume or production level, such as rent, utilities, insurance premiums, employee salaries, etc.

• Variable Expenses: These expenses vary based on business activity, such as sales volume or usage rates, like packaging materials or marketing costs.

• Direct Expenses: These costs can be directly traced back to the production or sale of a specific product or service offered by an ecommerce business.

• Indirect Expenses: These expenses are not directly related to any specific products but contribute towards running an ecommerce business as a whole, like website maintenance.

How Operating Expenses in E-Commerce Impact Profitability

If your OpEx increases, it eats into the company’s profits and reduces its overall net income. This means that a business with high revenues and significant operating expenses may not be as profitable as expected.

Furthermore, an increase in operating expenses could also indicate inefficiencies within the company’s operations. 

If costs continue to rise without a corresponding increase in revenue or sales volume, this could indicate issues with resource allocation or management practices. 

Operating expenses also affect cash flow, which is necessary to cover ongoing operational costs, such as the inability to meet orders or pay suppliers on time.

Common Operating Expenses in E-Commerce Businesses

When running an ecommerce business, every operating expense in ecommerce needs to be taken into account in order to manage finances and ensure profitability effectively. 

These expenses can vary depending on the specific nature of the business, but here are some of the most common operating expenses for ecommerce businesses:

Rent

• Rent of lease cost for a dedicated office or warehouse space

Marketing and Advertising

• Online advertising campaigns (e.g., social media, search engine marketing)

• Website maintenance and development costs

• Email marketing and other promotional activities

Shipping and Fulfillment

• Cost of packaging and shipping products

• Fulfillment center fees (if using a third-party service)

• Shipping insurance

Website Hosting and Maintenance

• Domain registration fees

• Website hosting costs

• Security measures (e.g., SSL certificates)

Inventory Costs

• Cost of goods sold (COGS)

• Storage costs (if you have a warehouse)

• Inventory management software

Payroll

• Salaries and wages for employees

• Payroll processing fees

Insurance

• Business liability insurance

• Cybersecurity insurance

• Property insurance (if you have a physical location)

Bank & payment Fees

• Transaction fees

• Account maintenance fees

Legal and Regulatory Costs

• Legal fees for contracts, trademarks, and other legal matters

• Licensing and permits

Utilities

• Electricity, water, and internet costs (if you have a physical location)

Retirement Plans

• Contributions to retirement plans for employees (if applicable)

Business Travel and Vehicle Expenses:

• Travel expenses for business meetings or events

• Vehicle expenses (if applicable)

Software

• E-commerce platform fees

• Software for inventory management, order processing, and bookkeeping

General Expenses

• Basic supplies, such as paper, ink cartridges, computers, printers, and furniture

How to Reduce and Manage Operating Expenses in E-Commerce

E-commerce businesses cannot ignore OpEx for far too long, or else they can quickly add up and eat into their profits.

However, managing operating expenses is a continuous process that requires constant monitoring and adjustments to find out what works for you.

To get you started, we have brought you some proven strategies you can implement to control costs and improve your bottom line actively:

1. Start by analyzing your current operating expenses and creating a budget that outlines the maximum amount you can spend on each expense category. 

2. Perform regular expense audits to see where your money is going and identify areas where costs can be reduced or eliminated

3. Negotiate with your suppliers and vendors for better prices or discounts. You can secure better terms by ordering in bulk or committing to long-term contracts

4. Optimize inventory levels to avoid excess inventory, tying up cash flow, and increasing storage costs.

5. Utilize technology to reduce operating expenses, such as implementing inventory management software or automating tasks like bookkeeping, invoicing, and payroll. 

6. Outsource non-core activities to companies with specialized expertise. These companies can perform these tasks more efficiently, saving you money in the long run.

7. Review recurring subscription services to determine if they are still providing value, and consider canceling those that are no longer cost-effective.

The Role of Bookkeeping in Tracking Operating Expenses

The key to managing any successful ecommerce business is knowing and controlling how much they are spending and where which is only possible through bookkeeping.

Bookkeeping involves recording all income and expenditures. By doing so, businesses can create a clear and organized overview of their cash flow. 

This enables them to identify any areas where unnecessary spending may be occurring or pinpoint potential cost-saving measures that can be implemented to improve their bottom line.

But how does doola Bookkeeping help in this process? Let’s take a closer look at some of its features:

• Automated Expense Tracking: It automatically tracks all your business transactions, which include bills paid, credit card transactions, and other business purchases from your account.

• Categorization: The platform also allows you to categorize your operating expenses into different categories, providing you with a clear breakdown of where your money is being spent.

• Actionable Reports: You can generate detailed financial statements over any period you desire. This makes it easier to analyze trends and identify areas where cost-saving measures can be implemented.

• Multi-Currency Capabilities: For ecommerce businesses, keeping track of operating expenses in multiple currencies can be quite challenging. doola simplifies this process by converting them into one single currency for reporting purposes.

• Bank Reconciliation: doola makes reconciliation hassle-free by automatically matching transactions between your bank account and sales data from your ecommerce platform.

• Tax Assistance: doola simplifies tax compliance by keeping your books up-to-date with accurate expenses. We also save you time and reduce the risk of errors by filing your tax returns.

• Sales Tax: We offer sales tax support, helping you comply with tax laws and ecommerce nexus, especially if you sell to customers in multiple states. 

• Tax Benefits: We help identify tax-deductible expenses to reduce your tax bill. We also ensure that all eligible expenses are properly tracked and recorded for tax purposes.

Book a demo now to see how doola’s advanced features make it an essential tool for ecommerce business owners.

Simplify Your E-Commerce Bookkeeping With doola Bookkeeping

As your online store grows and expands, the number of transactions can quickly become overwhelming. This means that old pen and paper or spreadsheets won’t be enough!

What you need is the combination of doola’s comprehensive bookkeeping software and services.

Our user-friendly software syncs with your business bank account to categorize all transactions automatically, making it easier for you to track your operating expenses.

Aside from its software solution, doola also offers dedicated bookkeeping and accounting services from a team of experienced professionals. 

We’ll handle all aspects of your bookkeeping, including reconciliations, tax filings, and financial reporting, giving you more time to focus on growing your business.

Book a demo to experience the benefits of doola today!

FAQs

How do operating expenses differ from the cost of goods sold (COGS)?

Operating expenses are the costs that a business incurs in its day-to-day operations to keep the business running, such as rent, utilities, employee salaries, advertising, and so on. 

On the other hand, cost of goods sold (COGS) refers to the direct costs associated with producing or acquiring products that are sold by the ecommerce business.

Can operating expenses be deducted for tax purposes?

Yes, most operating expenses can be deducted for tax purposes if they are considered ordinary and necessary for conducting trade or business according to IRS guidelines.

How often should ecommerce businesses review their operating expenses?

It is recommended that ecommerce businesses review their operating expenses at least quarterly but preferably monthly.

What are some common mistakes ecommerce businesses make in managing expenses?

One common mistake made by ecommerce businesses is not correctly categorizing their different types of operating expenses.

Also, inadequate record-keeping or lack of proper accounting practices can result in discrepancies and errors when calculating taxable income.