What Are Operating Expenses? Basics and Examples

For service industries, operating expenses (OPEX) include nearly all of the ongoing costs of running a business including rent, utilities, non-billable payroll, marketing, and office supplies.  It is different from capital expenses (CAPEX), which include investments in long-term assets such as equipment, computers, furniture, and vehicles.

Some industries — such as manufacturing, retail, and food service — separate the cost of goods sold (COGS) from other operating expenses. For example, a retailer will deduct the cost of their inventory from the sale price to find a simple gross margin. Then, most other expenses needed for daily operations are classified as operating expenses. We'll use this approach in this article.

Read on to learn about the different operating expenses and how to calculate and optimize these expenses for your company.

What are operating expenses?

Operating expenses are the ongoing costs a business pays to keep its daily operations running. These may include items such as payroll, rent, utilities, and office supplies. They represent the money required to manage the business, not to manufacture a product or deliver a specific service. 

For example, hours spent in internal meetings, and payroll needed for general operations, are operating expenses. But billable hours are not — they are listed as a cost of service. Tracking these different expenses can help a company accurately measure its profitability and find places where expenses are too high.

Operating expenses play a major role in a company's financial health. They directly influence the bottom line by impacting net income, which appears on the business's income statement. 

Understanding these costs helps business owners identify where money is being spent and where efficiencies can be made.

Operating vs non-operating expenses

Businesses separate operating expenses from non-operating expenses to understand which costs come from regular business operations versus those from one-off costs, external financial activities, and long-term investments. 

These distinctions help clarify profitability and operational efficiency.

Operating expenses are recurring, day-to-day costs required to keep the business running and support its core operations. They include:

• Rent and utilities
• Payroll and benefits
• Marketing and advertising
• Office supplies
• Maintenance and repairs

Together, these expenses reflect the ongoing effort needed to sustain normal business operations.

Non-operating expenses are irregular or one-time costs not directly tied to daily operations and often relate to financing, restructuring, or legal matters. They include:

• Interest payments on loans
• Legal settlements
• Layoff or restructuring costs
• Losses from asset sales
• Foreign exchange losses

These expenses typically arise from events outside the company's core business activities.

Operating vs capital expenses

Operating expenses are ongoing costs reported on profit and loss financial statements. Capital expenses are usually large, up-front purchases of capital assets reported on a cash flow statement. Only the allowed depreciation for these capital assets flows to the annual income statement.

Examples of capital expenses include:

• Patents, trademarks, etc.
• Real estate purchases
• Building renovations
• Manufacturing equipment
• Company vehicles
• Computer and other IT equipment

Why separate capital and operating expenses?

Separating CAPEX from OPEX helps ensure accurate accounting and financial reporting. A company's financial statements should clearly show how money is being used, whether for long-term investment or daily operations.

Here's why the separation matters:

• Clarity in financial performance. Keeping CAPEX and OPEX separate helps reveal how efficiently the business runs on a day-to-day basis, without distortion from one-time purchases.
• Accurate tracking of depreciation. Capital expenses, such as equipment or vehicles, lose value over time. Separating them allows accountants to track depreciation separately and spread the cost of the asset over its useful life.
• IRS compliance. The Internal Revenue Service (IRS) requires businesses to follow specific rules for capitalizing expenses and reporting depreciation. Mixing these categories can lead to compliance issues and inaccurate reporting.
• Better long-term planning. CAPEX reflects strategic investments that support growth, while OPEX reflects ongoing operational needs. Distinguishing between them helps business owners plan budgets more effectively.

Your CPA or finance manager will record the initial purchase of an asset under CAPEX, then calculate and report its depreciation within future OPEX reports. 

This ensures accurate records of both your short-term expenses and long-term investments.

What do operating expenses say about your business?

Operating expenses reflect how efficiently a company manages its resources and where it prioritizes spending. Here's what they can reveal:

• Financial stability. Consistent, well-managed operating expenses signal that a business is maintaining control over its costs — an indicator of long-term stability.
• Profit strategy. Spending patterns help show whether a company is investing enough to support growth or overspending in ways that may reduce profit margins.
• Operational efficiency. A close relationship between operating expenses and revenue highlights how effectively a business turns costs into productivity and performance.
• Risk tolerance. Low or aggressively reduced operating expenses might indicate a lean strategy or signal underinvestment in areas like talent or technology.

Tracking how operating expenses impact your bottom line can help you refine your strategy to protect profit margins and strengthen overall financial performance.

Common examples of operating expenses for businesses

Small business entrepreneurs, CPA professionals, and other corporate finance managers often deal with a common collection of operating expenses. Nearly all companies deal with sales costs, administrative expenses, utility costs, and other common operating costs.

Let's go over the most typical examples of operating expenses that a business incurs. Note that this applies to the non-manufacturing components of these factors.

Sales and marketing

Sales and marketing activities are critical to driving revenue and maintaining brand awareness. Because these functions directly support business operations, they fall under operating expenses.

Common examples include:

• Website design and management
• Paid digital advertising and social media campaigns
• Printing and distribution of promotional materials
• Store signage or event sponsorships
• Employee salaries and commissions for marketing or sales staff
• Travel, meals, and client entertainment expenses related to sales activity

These costs are essential investments in business growth and customer acquisition, but must still be tracked carefully to ensure marketing remains cost-effective.

Leases and rents

Renting or leasing office space, retail locations, or storage facilities represents a major ongoing operating cost for most companies. These payments are categorized as OPEX since they support daily functions, not long-term asset ownership.

In addition to rent, other related expenses — such as property management fees or parking space rentals — can also be recorded as part of your lease and rent costs.

Supplies

Office supplies might seem small in individual cost, but they add up significantly over time. Items like printer ink, paper, notebooks, pens, cleaning supplies, and other consumables all qualify as operating expenses.

Tracking these purchases helps businesses monitor operational efficiency and identify potential areas to reduce unnecessary spending.

Repairs

Keeping your office and equipment in good condition is another form of operating expense. 

Regular maintenance — such as HVAC servicing, landscaping, IT support, or janitorial work — prevents larger repair costs later.

Repairs to office equipment, vehicles, or property also fall under this category. These costs ensure that your workspace and assets remain functional and safe for employees and customers.

Utilities

Utilities represent another significant share of operating costs. These include essential services such as:

• Electricity, gas, and water
• Internet connectivity and data services
• Telephone and mobile lines
• Waste management and recycling services

All of these expenses are recorded under OPEX because they are necessary to maintain day-to-day business operations. Reviewing utility bills regularly can also help identify areas for energy efficiency improvements and cost savings.

Fixture depreciation

Depreciation refers to the gradual reduction in value of physical business assets over time. Equipment, office furniture, computers, and vehicles naturally lose value due to wear and tear.

This decrease in value is accounted for as an operating expense, allowing companies to match the cost of long-term assets to the revenue they help generate. 

Tracking depreciation ensures more accurate financial reporting and tax compliance.

Payroll

Payroll is one of the largest operating expenses for most businesses. It includes:

• Employee wages and salaries
• Overtime pay and bonuses
• Payroll taxes
• Employer contributions to benefit programs

In addition to direct compensation, the administrative costs of running payroll — such as accounting software, payroll services, and HR management systems — are also classified as OPEX.

Billable hours are treated separately from payroll, and are categorized as a cost of service. On a profit and loss statement, billable hours might be added directly below the revenue line to easily calculate gross profit, but are not considered an operating expense; in short, billable hours aren't supporting the core business, but are the core of the business.

Employee benefits

If you offer an employee benefits program, any costs associated with running the program can be categorized as an operating expense. This includes costs incurred due to:

• Health insurance
• Dental or vision insurance
• Life insurance
• Disability insurance
• Retirement benefits
• Gym memberships
• Paid holidays
• Paid time off (PTO) and vacation

Insurance

Whenever your business makes payments for insurance, whether to initiate a contract or to pay premiums, those costs are considered operating expenses. 

This includes your company's general liability insurance, fire insurance, commercial property insurance, workers' compensation insurance, and any other insurance policy.

How to calculate operating expenses

Entrepreneurs, business managers, CPAs, and other financial professionals should hold a solid understanding of operating expenses and how to calculate them.

Correctly calculating your company's operating expenses is important for calculating the overall profits of your business and clearly understanding your financial performance.

Standard operating expenses OPEX formula

The basic formula most businesses can use to calculate standard operating expenses is to simply add up all of their non-manufacturing operating expenses. The sum is your basic OPEX.

For example:

‍This simple calculation is useful for various financial reporting activities, including calculating your operating expense ratio (OER), a useful statistic in gauging the financial health of an organization.

Overall operating costs formula

You may want a broader picture of your company's operating costs that incorporates overhead expenses (such as selling, general, and administrative [SG&A] costs), research and development (R&D), and the COGS. 

To include all these items in your operating costs calculations, follow this formula:

This calculation provides an overall perspective of how your business is spending money.

What is the operating expense ratio (OER)?

The operating expense ratio (OER) can be used by any business to find a practical measurement of the ratio of expenses to revenue, giving an indication of the health of the business. 

OER is stated as a percentage. A low OER may be associated with a high net income ratio, meaning more profits. A high OER might indicate a low net income and low profits.

You can calculate the OER for your business using this simple equation:

By comparing your company's annual operating expense ratio (OER) with previous years and industry benchmarks, you can spot trends or increases in costs.

If the ratio rises, take action — such as auditing maintenance expenses, reviewing utility bills, or verifying specific cost entries — to identify and address any unexpected increases in OPEX.

Clarifying potential operating expenses

If you're organizing the financial statements for your small business and wondering whether specific items are operating expenses, check this list.

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Account for your OPEX with professional help

While some entrepreneurs may try to save some money by dealing with financial statements on their own, you may find yourself in need of professional help. 

If corporate finance is not your expertise, Upwork makes it easy to hire the finance and accounting professionals you need to stay on top of your company's finances. Upwork can connect you with CPAs, bookkeepers, and a wide range of other experienced finance professionals available for hire.

The talent pool doesn't end there. Explore our network of contractors anytime your small business needs to engage with an independent professional. They have the skills to help you grow.

Operating expenses FAQs

We've compiled answers to some frequently asked questions that may help clarify common concerns and guide your decision-making in managing your company's financial health effectively.

What are fixed costs, and how do they differ from variable costs?

Fixed costs are business expenses that remain constant regardless of the level of production or sales, such as rent, insurance, and salaries. 

Variable costs, on the other hand, fluctuate with production volume, including raw materials, development costs, and labor costs directly tied to production levels.

How does pricing affect gross profit?

Pricing plays a crucial role in determining gross profit. Gross profit is calculated as revenue minus the cost of goods sold (COGS) (or cost of services). 

Setting the right price for your products or services ensures that your revenue exceeds COGS, contributing positively to your gross profit.

How can accounting software help manage business expenses?

Accounting software can streamline the management of business expenses by automating tasks such as tracking expenses, generating financial reports, and maintaining accurate records. 

This helps businesses keep a close eye on their financial health and ensures that all expenses are accounted for on the balance sheet.

What role do operational activities play in a company's financial performance?

Operational activities encompass the day-to-day tasks that keep a business running, including production, sales, and service delivery. 

These activities generate revenue and incur expenses, directly impacting a company's profitability and overall financial performance.

Why is it important to separate business expenses on the balance sheet?

Separating business expenses on the balance sheet helps in accurately tracking and managing different types of costs, such as operational activities, fixed costs, and variable costs. 

This clarity is essential for making informed financial decisions and ensuring compliance with accounting standards.

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This article is intended for educational purposes and should not be viewed as legal or tax advice. Please consult a professional to find the solution that best fits your situation.