What are operating expenses (Op Ex)? Formulas and examples

Key takeaways:

• Operating expenses (Op Ex) are routine costs like salaries, rent, utilities, and marketing that are essential for day-to-day business operations.

• Manage Op Ex effectively by tracking fixed and variable expenses, using strategies like expense audits and vendor negotiations to improve cash flow, profitability, and operational efficiency.

Imagine you're reviewing your monthly financial statement and notice a substantial portion labeled "Operating Expenses." You recognize it's a significant expense category, but do you fully grasp what it encompasses and how it affects your bottom line?

Operating expenses, commonly abbreviated as Op Ex, are the routine bills and costs you regularly face—like paying your staff, renting office space, or paying for electricity and internet. Understanding your Op Ex is important to determine your company's financial health and influence critical business decisions.

In this guide, we'll break down operating expenses in simple terms, give you some relatable examples, and share practical tips to manage these expenses effectively—helping you boost profitability and keep your business running smoothly.

What exactly are operating expenses?

Operating expenses, or Op Ex, represent the regular costs associated with keeping your business operational on a day-to-day basis.

Unlike direct production costs, these expenses support the ongoing administrative and functional needs of your company, ensuring smooth operational continuity and efficiency.

Op Ex is also unlike capital expenditures (Cap Ex)—which involve long-term investments like buying property, equipment, or technology. In comparison, Op Ex only covers routine costs that keep your doors open and daily operations flowing smoothly.

Common examples of operating expenses you might see

Here is a detailed list illustrating typical examples of Op Ex:

• Employee salaries, wages, and benefits

• Rent or lease payments for office spaces

• Utilities like electricity, water, and internet

• Insurance (health, liability, property)

• Marketing and advertising

• Office supplies and consumables

• Regular maintenance and cleaning

• Depreciation and amortization

• Travel and entertainment

• Professional fees (like legal and accounting services)

How to accurately calculate operating expenses

Calculating your company's operating expenses is relatively straightforward. Use the following general formula:



Operating Expenses = Sum of All Day-to-Day Operational Costs (Excluding Direct Product Costs)

To get the exact figure, simply add up all the routine expenses listed in your income statement under operating activities.

Detailed total operating expenses formula

Total Operating Expenses = Salaries + Rent + Utilities + Insurance + Marketing + Supplies + Maintenance + Professional Services + Other Operational Costs

2 types of operating expenses

Now that you've understood the basics, let's talk about these two main categories of operating expenses: fixed and variable. Understanding the difference helps manage your finances more effectively.

Fixed operating expenses

These expenses remain stable regardless of your business volume or sales, including:

• Office lease or rental agreements

• Fixed insurance premiums

• Salaries of permanent staff

• Depreciation of assets

• Subscriptions and licenses

Variable operating expenses

These costs fluctuate according to business activity levels, including:

• Utility costs (varies with usage)

• Travel and transportation expenses

• Hourly or contract-based wages

• Seasonal or performance-based marketing initiatives

• Inventory management and storage costs

Understanding Op Ex on your financial statements

Clearly seeing Op Ex on your income statement is valuable because it lets you quickly assess how efficiently you're running your business.

Where Op Ex fits in your income statementYour income statement is usually structured like this:



Revenue ' Cost of Goods Sold (COGS) = Gross Profit

And this:



Gross Profit ' Operating Expenses = Operating Income

By breaking down exactly how much you're spending on day-to-day operations, you can easily pinpoint where you're overspending or underinvesting.

Why is managing operating expenses crucial?

Managing Op Ex effectively is critical for several reasons:

• Improves cash flow

• Boosts profitability

• Enhances operational efficiency

• Gives you a competitive advantage

The operating expense ratio: A helpful metric

To see how effectively you're managing your expenses, use the operating expense ratio:



Operating Expense Ratio = (Operating Expenses Revenue) 100

Ideally, your Op Ex ratio should range between 60%-80%, but it can vary depending on your industry. Monitoring this regularly can help spot opportunities for savings.

Practical ways to reduce operating expenses

Here's how you can optimize your Op Ex:

• Regularly audit expenses to find unnecessary spending

• Negotiate better terms with vendors and suppliers

• Automate routine administrative tasks

• Switch to energy-efficient utilities

• Optimize your marketing strategies for better returns

• Use cloud solutions to minimize infrastructure costs

• Consolidate and streamline your software and subscriptions

Common FAQs about Op Ex

Are salaries considered operating expenses?

Yes! Salaries for employees not directly involved in production are Op Ex.

Where do operating expenses show up on financial statements?

Op Ex shows up right below gross profit on your income statement.

What's the difference between operating and non-operating expenses?

Operating expenses relate directly to your core business operations, whereas non-operating expenses are unrelated, like interest payments or investment losses.

Can operating expenses be both fixed and variable?

Absolutely. Op Ex includes both fixed costs like rent and variable costs like utilities.

Make managing Op Ex easier with Rho

Managing Op Ex effectively can be challenging. But regularly reviewing and controlling these costs is crucial to ensure your business stays profitable and ready for growth. That's where Rho can help.With Rho's user-friendly platform, you get clear, real-time insights into your spending, making it easy to manage and reduce costs strategically. Automate expense tracking, streamline payments, and forecast future costs—all from one intuitive place.

See firsthand how Rho can help your business boost efficiency and profitability today.

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Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.