What Are Operating Expenses?
Operating expenses (OpEx) are the ongoing costs a business incurs to run its day-to-day operations that aren't directly tied to producing goods — such as rent, salaries, utilities, marketing, and insurance. They're subtracted from gross profit to reach operating income.
What operating expenses are and why it matters
Operating expenses sit between cost of goods sold and net income on the income statement. Unlike COGS, which scales with production, OpEx covers the general costs of keeping the business running regardless of a single sale. The category typically includes selling, general, and administrative expenses (SG&A) plus depreciation. Controlling operating expenses is a key profitability lever — since they don't rise one-for-one with revenue, keeping them lean lets more of each additional sales dollar reach the bottom line. Distinguishing operating expenses from capital expenditures (long-term asset purchases) also matters for how costs hit the financials.
A worked example
A company has gross profit of $300,000. Its operating expenses are: salaries $120,000, rent $36,000, marketing $25,000, utilities $9,000, and insurance $10,000 — totaling $200,000. Operating income = $300,000 − $200,000 = $100,000. If revenue grows next year but the business holds operating expenses near $200,000, most of the additional gross profit converts straight into higher operating income.
How firms handle it today
Firms capture operating expenses from bills and bank feeds, code them to the right accounts, and review classification at close to ensure OpEx and operating income are stated accurately.
Related terms
- Expense
- Overhead
- Income statement
- COGS
- Net income
FAQ
What's the difference between operating expenses and COGS?
COGS is the direct cost of producing goods sold; operating expenses are the indirect costs of running the business, like rent and salaries.
What's the difference between OpEx and CapEx?
Operating expenses are consumed within the period; capital expenditures buy long-term assets that are depreciated over time.
What's included in operating expenses?
Salaries, rent, utilities, marketing, insurance, office costs, and depreciation — the general costs of operating the business.