What are operating expenses?
Operating expenses keep the business running whether or not a particular product is sold. They sit below [gross profit](/glossary/gross-profit) on the [income statement](/glossary/income-statement), often grouped as selling, general and administrative (SG&A) expenses.
Common examples
- Rent and utilities
- Salaries of admin, sales and management staff
- Marketing and advertising
- Software subscriptions and IT
- Insurance
- Professional fees (legal, accounting)
- Office supplies
- Depreciation of office equipment
- Travel
OpEx vs CapEx
OpEx is consumed within the year and expensed immediately. [Capital expenditure](/glossary/capital-expenditure) buys long-term assets and is depreciated over time.
OpEx vs COGS
[Cost of goods sold](/glossary/cost-of-goods-sold) covers direct production costs. OpEx covers everything else needed to operate.
Key ratio
Operating expense ratio = Operating expenses ÷ Revenue
A falling ratio as revenue grows suggests the business is scaling efficiently.
Example
A software company has $2 million revenue, $400,000 cost of revenue and $1.1 million of operating expenses. Operating profit = $500,000 and the OpEx ratio is 55%.
Managing OpEx
- Review subscriptions and contracts regularly.
- Compare spending against [budget](/glossary/budget) monthly.
- Track [overhead](/glossary/overhead) per employee or per sale.