Income and Operating Expenses

In general, gross income depends upon the number of units sold, and then price per each unit. Both these elements are matters for the marketing expert rather than for the financial expert.

The financial success of an enterprise, however, depends to a considerable extent upon the gross income. It must be large enough not only to pay the operating expenses of the business, to pay a fair return on the capital invested and to provide a fair margin to compensate the projectors of the enterprise, but also properly to maintain the plant and to insure the future success of the business. In the case of an enterprise with wasting assets, as a coal mine, the gross income must also provide a surplus sufficient to return to the owners the capital invested.

The first demand on income is for operating expenses. The most important problem to be considered under this head is the question of proper maintenance of the plant and the introduction of improvements that may reduce operating costs for the business.

Whether or not some improvements should be made is usually a simple question of economic selection. If a machine, for example, can reduce or completely eliminate some operating expenses by dispensing with the labor, say, of five men, the machine ought to be installed, if the interest on the capital cost plus the costs of maintaining the machine are less than the wages of the five men. Money spent on other terms for a capital asset is not economically invested.

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