Even if you’ve spent just five minutes taking a look at your company’s financial statements, you’ll have noticed that a lot of your business expenditure is going to operating expenses (OpEx).
Operating expenses, commonly abbreviated as OpEx, are the group of ongoing costs associated with running your company’s day-to-day operations, such as rent, marketing, and wages.
Given the large percentage of business spending that falls under this umbrella, it's only natural that many business and finance leaders want to get a better idea of what operating expenses are and how they work.
In this guide, we’ll explore several examples of operating expenses, discuss the importance of tracking OpEx, and cover some best practices for managing and reducing them.
OpEx meaning
Operating expenses are all ongoing costs associated with running your company’s daily operations.
This includes costs like rent, utilities, insurance, wages, marketing costs, office supplies, and equipment maintenance, among other things.
OpEx is distinguished from CapEx (capital expenditure), which are investments in long-term assets, such as the purchase of new machinery. OpEx is typically short-term and fully deductible for tax purposes.
Good management of operating expenditures is critical for maintaining profitability. Even if revenue looks good, if you’re spending too much on OpEx, you’ll struggle to make a healthy profit margin.
Examples of operational expenses
Here are a few of the most common kinds of operational expenses you’ll find listed on the income statement.
1. Employee-related costs
Examples of employee-related costs include:
- Salaries and wages
- Employee benefits (e.g., health insurance, retirement contributions)
- Training and development expenses
- Recruitment and hiring costs
2. Facility and utilities
Examples of facility and utility expenses include:
- Rent or lease payments
- Electricity, water, and gas
- Internet and phone services
- Property maintenance and repairs
- Cleaning services and supplies
3. Office supplies and equipment
Office supplies and equipment are a classic example of OpEx. These include:
- Stationery and office materials
- Computers, printers, and other office equipment
- Furniture rental
- Software subscriptions and licenses
4. Marketing and advertising
Expenses that fall under the marketing and advertising umbrella include:
- Social media ad spend
- Google Ads or other PPC campaigns
- Event sponsorships and trade shows
- Marketing materials (e.g., brochures, banners)
- Content creation and influencer partnerships
5. Sales and distribution
Costs associated with sales and distribution are examples of operating costs as well. These include:
- Shipping and delivery costs
- Commissions for sales staff
- Packaging materials
- CRM or sales platform subscriptions
6. Administrative and professional services
Examples of administrative and professional services OpEx include:
- Legal fees
- Accounting services
- Business consulting
- Regulatory compliance costs
7. Insurance
Many kinds of business insurance are operating expenses, such as:
- General liability insurance
- Property insurance
- Workers’ compensation
8. Technology and IT services
Some IT and tech-related services that are considered OpEx include:
- Website hosting and domain registration
- Cloud storage services
- IT support and maintenance
- Cybersecurity services
9. Miscellaneous
Finally, you’ve got the miscellaneous category, which covers expenses like:
- Travel and transportation
- Meals and entertainment for business purposes
- Subscriptions to industry publications or databases
Importance of tracking operation expenses
Why track operating expenses?
Here are five important reasons why it's a good idea to stay on top of this category of business spending:
- Budget management. Tracking OpEx helps business leaders control costs, allocate resources more effectively, and avoid going over budget.
- Profitability insights. Monitoring OpEx helps you understand which costs directly impact your profit margins.
- Strategic decision-making. Accurate OpEx tracking supports smart financial planning and decision-making.
- Tax efficiency. Since OpEx is often tax-deductible, tracking these costs accurately helps ensure accurate tax reporting.
- Performance evaluation. Having OpEx data clean and up-to-date helps you assess operational efficiency and identify areas for cost optimization.
Impact of operating expenses on financial statements
How do operating expenses impact your financial statements?
OpEx is listed directly on the income statement. It reduces net income on this statement, impacting key metrics like EBITDA and operating profit.
On the balance sheet, operating expenses indirectly impact cash flow management and current liabilities.
Finally, the cash flow statement aids in trading how well OpEx is funded by operating revenue, your earnings from key business activities.
Calculating operational expenses
Here, we explore how accountants and financial leaders calculate OpEx.
Operation expenses (OpEx) formula
Operating expenses don’t have a single fixed formula.
Rather, your total OpEx is calculated simply by adding up all of the different expense categories that fit under the OpEx umbrella.
A general formula that could be applied to represent this is:
Factors affecting operation expenses
The major factors that impact your organization’s operational expenses are:
- Business size and scope. Larger and more complex businesses have higher operating expenses as they have more staff, infrastructure, and specific operational needs.
- Industry. Certain industries have higher operating expenses than others. For example, manufacturing companies are likely to have high equipment maintenance costs, pushing up OpEx.
- Economic conditions. Inflation, interest rates, and economic downturns can all have an impact on the prices of operational costs like utilities, services, and materials.
- Operational efficiency. Companies with inefficient processes, outdated equipment, or poor inventory management can increase expenses unnecessarily.
- Geographic location. High-cost regions like major city centers lead to higher rent, wages, and utility costs.
- Regulatory requirement. Maintaining compliance with industry-specific regulations can add expenses such as audits or certifications, which are considered OpEx.
Comparing different kinds of expenses
What other kinds of expenses exist, and how do they compare to operating expenses?
Operating expenses vs. non-operating expenses
Operating expenses are costs incurred as part of the daily operations of a business. They directly contribute to the operating profit of a business. Examples include utilities, rent, salaries, and marketing.
Non-operating expenses are those costs that aren’t directly related to core business activities. They don’t impact operating profit but do affect net income. Examples include investment losses and interest on loans.
Operating expenses vs. capital expenses
Another common distinction in business costs is the divide between operating expenses (OpEx) and capital expenses (CapEx).
The distinction is this:
Operating expenses are costs required to keep the business running, like equipment maintenance. Capital expenses are long-term investments in assets that can grow revenue or profitability, like the purchase of new equipment.
Fixed costs vs. variable costs
Fixed and variable expenses are two important categories of business costs that help business leaders manage cash flow and profitability.
Fixed costs remain constant regardless of production levels, such as overhead costs like your rent or insurance premiums. You don’t get to pay less rent just because you have a slow month!
Variable costs are the opposite. They fluctuate depending on production or sales volume. For example, if you produce more of a given product, you’ll need to buy more of the raw materials required to make it, and vice versa.
Managing operating expenses
Here are a few powerful best practices to implement to improve your management of OpEx and even reduce overall business expenditure.
Identifying and categorizing operation expenses
Start by identifying what business expenses are OpEx, and categorize them accordingly.
If you’re using an accounting tool like QuickBooks or Xero, this should be fairly straightforward, as they should already be categorized correctly.
Strategies to reduce operation expenses
Next, begin introducing strategies to reduce OpEx where possible.
Some examples of cost reduction strategies that you could implement include:
- Renegotiating vendor contracts
- Adopting energy-efficient practices
- Automating repetitive tasks like purchase approval workflows
- Outsourcing non-core functions
- Streamlining processes to eliminate waste
Tools and technologies for managing operational expenses
One of the best ways you can improve your management of operational expenditure is to take advantage of modern software tools. These can help you streamline purchase processes, improve reporting abilities, and automate manual tasks.
Some categories to look into include:
Setting budgetary goals for operation expenses
Setting clear and achievable spending limits is an important tactic for better management of operational expenses.
Use historical spending data, financial goals, and planned growth initiatives to allocate budgets for specific categories. Then, use your expense management platform to keep an eye on how the actual spending stacks up against the budget.
Monitoring and reviewing expenses regularly
Implement a review process and cadence (once a quarter should be sufficient).
Use these opportunities to dig into records of spending and identify trends, spot inefficiencies, and make any necessary adjustments to budgets.
This process of regular monitoring helps prevent unchecked spending and supports more proactive decision-making.
Collaboration between finance and operational teams
Our final tip is all about inter-team alignment.
By encouraging and facilitating solid teamwork between finance and operational departments, you’ll be better able to align expense management with overarching business goals.
This will relieve tension between finance and other departments, and ensure that operational needs are met efficiently without exceeding budgetary constraints.
Streamlining operational expenses with BILL
Keeping on top of operational expenditure is critical for maintaining profitability and ensuring that actual spending aligns with budgets and projects.
The best way to improve your control over OpEx is to implement an expense tracking and management solution like BILL.
Our powerful suite of tools helps you track business spending in real time, set up notifications for employee-approved spending, and streamline reconciliation processes.
