Operating Expense (OpEx) – Meaning, Formula and How to Calculate Operating Expenses

Every business, regardless of size or industry, incurs a range of costs to keep operations running smoothly. Some expenses are predictable and recurring, while others fluctuate based on scale, demand, or business decisions. How these costs are tracked, classified, and controlled has a direct impact on profitability, cash flow, and long-term sustainability.

For finance teams and business owners, understanding the nature of operational spending is essential for budgeting, pricing, performance analysis, and strategic planning. Poor visibility into recurring costs can erode margins, distort financial reporting, and limit a company’s ability to scale efficiently. On the other hand, structured expense tracking and cost discipline enable better decision-making and financial control.

In this blog, you will learn how businesses track, categorize, and manage operational spending. It covers operating expense structures, calculation methods, reporting formats, and the financial impact of recurring costs, helping finance teams and decision-makers assess how these expenses affect profitability and overall business performance.

What are operating expenses (OpEx)

Operating expenses (OpEx), or Operating Expenditure, refer to the ongoing costs incurred to run a business’s core operations. These expenses arise from regular business activities and are necessary for maintaining operational continuity.

Operating expenses typically include employee salaries, rent, utilities, administrative overheads, marketing spend, insurance, and routine maintenance. These costs are recurring in nature and are directly linked to the day-to-day functioning of the business.

From an accounting perspective, operating expenses are reported on the income statement. Most are recognised in the period they relate to, based on accrual accounting and matching principles. Since OpEx directly reduces operating income, it plays a critical role in determining operating profit and operating margin.

Operating expenses are different from capital expenditures (CapEx). While OpEx covers routine operational costs, CapEx relates to spending on long-term assets such as equipment, property, or technology. For example, the purchase of machinery is a capital expenditure, whereas the cost of running and maintaining that machinery forms part of operating expenses.

Operating Expense List

An operating expense list outlines the common costs incurred to run a business’s regular operations. These expenses are recurring and are recorded on the income statement during the accounting period in which they are incurred.

What is Operating Cost

Many teams confuse operating costs with operating expenses, so the key difference is scope.

Operating cost refers to the total cost incurred to run a business’s regular operations, including both operating expenses (OpEx) and, in many cases, the cost of goods sold (COGS). It represents the complete cost base required to generate revenue from core business activities.

While operating expenses cover indirect and administrative costs such as salaries, rent, utilities, and marketing, operating costs may also include direct production or service delivery costs, depending on the nature of the business. As a result, operating cost is often broader in scope than operating expenses.

For example, in a manufacturing or retail business, operating costs typically include raw materials and production labour (COGS) along with operating expenses. In contrast, for service-based businesses with minimal inventory, operating costs and operating expenses may closely overlap.

Understanding operating costs helps businesses evaluate cost efficiency, pricing decisions, and profit margins, as it reflects the total expense burden involved in running core operations.

Types of Operating Expenses

Operating expenses can be grouped into broad categories based on their function within the business. While the specific mix varies by industry, these categories help businesses monitor and control operational spending more effectively.

Administrative Expenses

Costs related to general business management, including accounting fees, legal services, office supplies, and administrative staff salaries.

Employee Salaries and Benefits

Compensation paid to employees, including salaries, wages, bonuses, and statutory or voluntary benefits such as insurance and retirement contributions.

Occupancy and Utilities

Expenses incurred for using business premises, such as office or warehouse rent, electricity, water, internet, and communication services.

Marketing and Advertising

Costs associated with promoting products or services, including digital advertising, branding activities, content creation, and campaign-related expenses.

Repairs and Maintenance

Spending on the upkeep of equipment, machinery, and office infrastructure to ensure uninterrupted operations.

Insurance and Compliance Costs

Premiums paid for business insurance policies and mandatory compliance-related expenses required to operate legally.

Depreciation and Amortization

Non-cash expenses that account for the gradual reduction in value of tangible assets and intangible assets used in operations.

Note: Inventory and raw material costs are typically classified under cost of goods sold (COGS). They form part of operating costs but are generally excluded from operating expenses under standard accounting treatment.

How to Calculate Operating Expenses

Calculating operating expenses (OpEx) is crucial in understanding whether a business is financially healthy and profitable. All the costs that a company incurs to run its daily activities are categorized under operating expenses, excluding the cost of goods sold (COGS) and capital expenditures (CapEx). Accurate calculation of operating expenses can help companies manage their finances, better allocate resources and make strategic decisions.

Operating Expenses Formula

The basic operating expenses formula is:
Operating Expenses = Total Expenses − Cost of Goods Sold (COGS) − Non-Operating Expenses

In practice, operating expenses are calculated by summing the operating expense line items shown in the income statement (for example, salaries, rent, utilities, marketing, admin, and other operating overheads).

Step-by-Step Calculation

1. Identify Total Expenses: The first step is to calculate total expenses for the period, including outflows due to operations, purchases, and other obligations.
2. Exclude COGS: Cost of goods sold consists of direct costs associated with creating a product or providing a service (such as materials or labor). As the cost is not a part of operating expenses, it must be excluded.
3. Exclude Non-Operating Expenses: Interest payments, loss on sale of an asset, or generally speaking, any costs incurred that are not related to daily operations, must be excluded when calculating operating expenses.

Example of Operating Expenses Calculation

Let’s understand how to calculate operating expenses with an example. Below is a company’s financial data for a month:

• Total Expenses: ₹200,000
• Cost of Goods Sold (COGS): ₹80,000
• Non-Operating Expenses: ₹20,000

To calculate the operating expenses, use the formula:

Operating Expenses= ₹200,000 − ₹80,000 − ₹20,000 = ₹100,000

In this case, the company’s operating expenses for the month are ₹100,000.

Importance of Accurate Calculation

If you want to understand the financial health of your business, ensure accurate calculation of operating expenses. High operating costs can eat into the profit margin, while optimizing operating expenses can lead to an increase in profits. By calculating OpEx, businesses can identify cost-cutting opportunities or processes that can be improved upon.
Understanding operating expenses helps businesses to calculate operating margin and operating profit, which are among the key performance indicators for how efficiently a company runs a business relative to its costs.

Operating Cost Format for Businesses

An operating cost format helps businesses record recurring operating expenses in a structured way for a specific period (monthly, quarterly, or annually). It improves visibility, supports budgeting, and makes internal reviews easier.
A standard format includes:

• Header: Company name and reporting period
• Expense Categories: Salaries, rent and utilities, admin costs, marketing, maintenance, insurance
• Itemised Entries: Expense name, amount, and notes (if needed)
• Total: Sum of all operating costs for the period

This format is most useful when businesses want consistent reporting across departments and quicker comparisons across months.

How to Reduce Operational Expenses

In order to survive and grow, business organizations need to manage and reduce operating costs. Although some of the expenses cannot be totally removed, businesses can work on improving current processes. Here are a few ways to control operating expenses.

Review and Renegotiate Vendor Contracts

Businesses can talk to vendors, review contract terms, and renegotiate with them for discounted rates. Developing a good relationship with suppliers and vendors could lead to better terms and conditions, lower prices, and bulk purchase discounts. In the long-term this can help reduce costs on materials, services, and other operational necessities.

Automate Redundant Processes

Companies wanting to improve productivity while reducing costs should consider automation. For instance, if an organization automates functions such as customer service or invoice generation, it eliminates the cost of human labor, is less likely to make mistakes, and becomes more productive in the long run. Businesses can use software and AI to automate activities such as payroll, inventory management, and to reduce overhead.

Save on Utilities

Energy costs are unavoidable. They can account for a meaningful share of operating costs, especially for energy-intensive businesses. Businesses can reduce these costs by using energy-efficient machinery and heating and cooling systems. Conducting educational seminars and encouraging employees to conserve energy may help. One can conduct energy audits to identify areas that can be improved upon. Businesses can save on operating costs by reducing their utility bills.

Consider Outsourcing Non-Core Activities

Companies could outsource IT support, payroll, customer services, or other non-core business activities. The benefits include dedicating the business’s time and resources to core functions and reducing the overhead costs. It also allows companies to work with industry experts, without incurring the costs of recruiting and training personnel for that purpose.

Offer Remote or Hybrid Work Environments

Allowing employees to work remotely presents several advantages. For example, companies can cut down on operating costs, such as rent for office space and maintenance costs for office buildings, including utility bills. By moving to a hybrid or a remote work model, companies can operate with the same headcount while reducing operational costs..

Regular Review of Operating Expenses

By reviewing operating expenses on a regular basis (for example, doing so every few months), companies can prevent unnecessary spending. If management remains mindful of the budget and keeps track of expenses, it can adjust spending where appropriate and avoid high costs. Financial tracking tools can help identify overspending issues, which the companies can then work on promptly.

Businesses can control operating expenses by implementing cost-cutting practices, making informed investments, and regularly reviewing expenses. These strategies can help businesses optimize operations and increase overall profit.

Read More: Difference between Expense and Expenditure

What is the Difference Between Operating Expenses and Capital Expenditures?

Businesses commonly have two kinds of expenses – Operating expenses (OpEx) and Capital Expenditures (CapEx). Knowing the distinction between the two is necessary for financial planning and reporting. OpEx represents those costs that are needed to run a business on a daily basis, while CapEx are investments in long-term assets that provide value over time.

What is CapEx?

Capital expenditures (CapEx) are expenses associated with acquiring or upgrading physical assets. This is spending on property, plant, equipment, and technology. CapEx involves long-term projects meant to increase productivity, expand business capabilities, or raise asset value. For example, making a large purchase like getting a new manufacturing machine or upgrading your office infrastructure.

CapEx is reported on the balance sheet as an asset, which depreciates over the years rather than a direct deduction from the company’s income. This means businesses spend money upfront but the total cost is spread through the life of the asset.

Differences Between OpEx and CapEx

Operating Expenses (OpEx) and Capital Expenditures (CapEx) differ in purpose, accounting treatment, and financial impact. Understanding this distinction is essential for budgeting, financial reporting, and long-term planning.

Read More: Differences Between OpEx and CapEx

What is the Impact of Operating Expenses on Profitability

Operating expenses are vital in determining a company’s profitability. These recurring and short-term costs directly impact operating income and net profit. High operating expenses can lead to lower profit margins, while effective cost management can improve profitability and overall performance.

• Operating Income: Also known as operating profit, it represents the profit a company makes from its key business activities, excluding interest and taxes. Operating income is calculated by deducting operating expenses from gross income. The higher the operating expenses, the lower the operating income, limiting a company’s ability to reinvest or provide returns to shareholders.
• Impact on Profit Margin: Operating expenses have a direct effect on profit margins. If the revenue does not increase, businesses with high fixed costs may see reduced margins. On the other hand, businesses that learn to control operating expenses can achieve high profitability even if their revenue growth is moderate.

What is the Role of Operating Leverage in Managing Operating Expenses

Operating leverage refers to the extent to which a business uses fixed operating expenses in its cost structure. It measures how sensitive operating income is to changes in revenue due to the presence of fixed costs such as rent, salaries, and long-term service contracts.

A business with high operating leverage has a larger proportion of fixed operating expenses. When revenue increases, operating income grows at a faster rate because fixed costs remain unchanged. However, if revenue declines, profitability can fall sharply since these fixed expenses must still be paid.
Conversely, a business with low operating leverage relies more on variable costs. While this limits profit expansion during high-growth periods, it provides greater flexibility and lower risk during periods of reduced demand.

Operating leverage is closely linked to operating expense management. Businesses that effectively control fixed operating expenses are better positioned to scale revenue while maintaining financial stability.

Why Does Operating Leverage Matter

• Higher Profit Margins: If a firm has a high operating leverage, it can significantly benefit from small increases in sales. Since its fixed costs won’t change, any increase in revenue will correspond directly to increased profits.
• Risk of Revenue Decline: On the flip side, businesses with high operating leverage face higher risks when a downturn in the economy or slow sales occur. Minor declines in revenue can negatively impact a business’s profitability as the fixed costs remain unchanged.

How to Manage Operating Leverage

To manage operating leverage effectively, businesses can focus on the following strategies:

• Revenue Maximization: Increasing sales volume and optimizing pricing strategies can help companies with high operating leverage increase profitability.
• Control Fixed Costs: Keeping fixed expenses, such as rent and long-term contracts, under control allows businesses to remain flexible and adapt to changes quickly.

Conclusion

Businesses looking to not only survive but prosper must concentrate on managing and controlling operating expenses. A typical operating expenses list includes rent, salaries, premium payments, utilities payments, and other expenses, which are directly linked to the company’s profitability.

Knowing the nature of these expenses and employing control strategies can help businesses improve financial and operational efficiency. Regular tracking of operating expenses helps businesses optimize resource allocation and identify cost-saving areas and financial issues early on. Companies that can reduce unnecessary spending without compromising on quality can have better profit margins and long-term growth.

FAQs

1. What are operating expenses?
Operating expenses are the recurring costs incurred to run a business’s core operations. These include expenses such as salaries, rent, utilities, marketing, insurance, and routine maintenance.

2. What is included in operating expenses?
Operating expenses include administrative costs, employee compensation, rent and utilities, marketing and advertising spend, insurance premiums, repairs and maintenance, and depreciation or amortization related to operational assets.

3. Are operating expenses tax-deductible?
Most operating expenses are tax-deductible, provided they are incurred wholly and exclusively for business purposes. Businesses should ensure correct classification and comply with applicable tax regulations.

4. How do operating expenses affect profitability?
Operating expenses directly reduce operating income. Higher operating expenses can lower profit margins, while effective expense control improves operating profit and overall financial performance.

5. How do operating expenses differ from operating costs?
Operating expenses cover indirect and administrative costs required for daily operations, while operating costs may include both operating expenses and direct costs such as cost of goods sold, depending on the business model.

6. Can operating expenses vary across industries?
Yes, operating expenses differ significantly by industry. Manufacturing businesses typically incur higher maintenance and labour costs, while service-based businesses often have higher payroll, rent, and marketing expenses.

7. Why is it important to monitor operating expenses regularly?
Regular monitoring helps businesses control costs, identify inefficiencies, and improve financial planning. It also supports better budgeting, pricing decisions, and long-term profitability.