What Is OpEx? Operating Expenses Meaning and Examples

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OpEx, short for operating expenses or operational expenditure, is the money a business spends to run its normal, day-to-day operations during a period: rent, salaries, utilities, marketing, insurance, office supplies, repairs and similar recurring costs. These costs are used up in the period they are incurred, so they are recorded as expenses on the income statement right away rather than added to the balance sheet as assets. That timing separates OpEx from capital expenditures (CapEx). Its link to core activities separates it from non-operating expenses such as interest.

What OpEx Includes

Common operating expenses include:

• Salaries, wages and benefits (payroll)
• Rent and lease payments for offices, stores or warehouses
• Utilities such as electricity, water and internet
• Sales and marketing costs, including advertising and commissions
• Accounting, legal and other professional fees
• Bank charges
• Insurance
• Office supplies and software subscriptions
• Repairs and maintenance
• Research and development (R&D)
• Depreciation and amortization of operating assets

What counts as operating depends on what the company does. Interest earned on loans is the core business for a bank, while it is a side item for a retailer. Holding property may be an operating activity for a real estate firm and incidental for a software company. The classification follows the company’s main line of business, not the type of payment.

Payroll is an operating expense in nearly every business. A software developer’s salary is normally OpEx too. Under US GAAP, though, certain costs of developing internal-use software can be capitalized during the development stage, so part of a developer’s pay may be recorded as an asset and amortized instead of expensed immediately.

Where OpEx Sits on the Income Statement

A typical income statement groups costs into cost of goods sold (COGS); selling, general and administrative expenses (SG&A); depreciation and amortization; other operating expenses; interest expense; and income taxes. The first four are operating costs. Interest and taxes are not.

The basic relationships are:

Gross profit = Revenue − COGS

Operating income = Gross profit − Operating expenses

The term has two common uses. In the narrow sense, used on many income statements, “operating expenses” means the costs below gross profit: SG&A, R&D and similar items, with COGS shown separately. In the broad sense, “total operating costs” includes COGS as well, because making or buying the product is part of operations. When comparing figures from different sources, check whether COGS is inside or outside the OpEx number.

SG&A is usually the largest OpEx line for companies that do not report R&D separately. It contains administrative costs (executive pay, finance, HR, legal, office overhead) along with selling costs, so general and administrative costs are part of operating expenses.

Does OpEx Include Depreciation and Amortization?

Yes, when the underlying asset is used in operations. Depreciation spreads the cost of a machine, vehicle or building over its useful life, and amortization does the same for intangibles such as patents or software. Each period’s charge is an operating expense, even though no cash leaves the business that period. Some companies report a separate depreciation and amortization line, some fold it into COGS (for factory equipment) or SG&A (for office assets), and some disclose it only in the notes.

Analysts sometimes use “cash OpEx,” which excludes depreciation, amortization and other non-cash charges. EBITDA is built on the same idea.

Fixed and Variable Operating Costs

Some operating expenses stay roughly the same regardless of output. Rent, insurance and salaried staff are fixed costs. Others rise and fall with production or sales, such as sales commissions, shipping, payment processing fees and hourly labor. These are variable costs.

The mix affects how profit responds to sales. A business with mostly fixed OpEx sees operating income swing sharply when revenue changes, because costs stay flat while sales move. This is operating leverage. A business with mostly variable OpEx has steadier margins but less upside when sales grow.

OpEx can rise for several reasons: hiring, wage increases, higher rent on lease renewal, a marketing push, more sales (which lifts variable costs), new software subscriptions, or general inflation. A rising OpEx figure is not a problem in itself if revenue is growing faster.

Example of OpEx

The following is a hypothetical company for one year:

Operating expenses here use the narrow definition, so COGS is excluded. Operating income is $900,000 − $620,000 = $280,000. Interest is subtracted only after operating income because it reflects how the company is financed, not how it operates. On this basis OpEx equals 31% of revenue ($620,000 ÷ $2,000,000). Under the broad definition, total operating costs would be $1,720,000, or 86% of revenue.

OpEx vs. CapEx

Capital expenditures are purchases that create or improve assets expected to provide value beyond the current year. Examples include buildings, factory equipment, vehicles, computers and furniture, as well as intangibles such as patents, copyrights and trademarks.

The difference lies in timing. If a business spends $100,000 on payroll, the full amount is an expense this year. If it spends $100,000 on a delivery vehicle, the cost is capitalized as an asset and depreciated over several years. Each year’s depreciation then becomes an operating expense.

Repairs that keep an asset in working order are usually OpEx. Improvements that extend its life or add capacity are usually CapEx. Leasing equipment instead of buying it, or paying for cloud services instead of buying servers, can shift spending from CapEx to OpEx, a choice that comes up often in IT budgeting.

Both matter for valuation. Free cash flow subtracts CapEx from operating cash flow, and that figure feeds a discounted cash flow (DCF) model.

Operating vs. Non-Operating Expenses

Non-operating expenses are costs unrelated to the company’s core activities. The most common are interest and other borrowing costs and losses on the disposal of assets. Restructuring charges, lawsuit settlements and currency losses are often reported outside operating income as well, though presentation varies by company.

Analysts often strip out non-operating items to judge the underlying business apart from financing decisions or one-off events.

Tax Treatment

In the US, a business can deduct expenses that are ordinary (common and accepted in its trade) and necessary (helpful and appropriate for the business). Operating expenses that meet this test are generally deductible in the year they are incurred, which reduces taxable income right away. Capital expenses must be capitalized and recovered over time through depreciation or amortization, subject to IRS rules on asset classes and recovery periods. Tax and accounting treatment do not always match, so a cost expensed on the books may follow a different schedule on the tax return.

How OpEx Is Used and Its Limitations

Managers use OpEx in budgeting. An OpEx budget projects recurring running costs separately from capital budgets, which are evaluated with tools such as net present value and IRR. Investors track OpEx as a share of revenue over time and against peers to judge cost discipline. Cutting OpEx can raise profit, but cuts to marketing, R&D or staff can weaken future revenue or service quality.

The measure also has limits:

• Definitions vary. Whether COGS, depreciation or one-off charges are included changes the figure, so ratios from different sources may not match.
• Industry differences. A software company and a grocery chain have very different cost structures, so OpEx ratios mainly make sense within a sector.
• Classification choices. Capitalizing costs such as software development or leasing instead of buying moves spending between OpEx and CapEx without changing the underlying cash spent.

FAQs

The Bottom Line

OpEx matters to managers building budgets and to investors judging cost discipline against revenue and peers. Before comparing figures, check whether COGS, depreciation and one-off charges are included, and compare ratios mainly within the same sector. Cutting OpEx can raise profit, but reducing marketing, R&D or staff may weaken future revenue or service quality.