What are operating expenses (OpEx)? Definition, formula, and examples

Operating expenses are the ongoing costs required to run your business, excluding the direct costs of producing your products or services. Every dollar you spend keeping your business running day-to-day is an operating expense, from rent and salaries to software subscriptions and office supplies.

Understanding and managing these expenses directly affects your profitability and cash flow.

What are operating expenses?

Operating expenses (OpEx) are the costs your business incurs through normal operations that aren't directly tied to producing goods or services. These recurring expenses keep your doors open and your business functioning, whether you're selling one unit or 1,000.

Unlike the cost of goods sold (COGS), which includes the materials or labor that go directly into making your product, operating expenses support your overall business operations. Classic examples include rent, utilities, insurance, and advertising costs.

OpEx appears on your income statement after gross profit and shows how much you spend to maintain your operations. As such, OpEx plays a major role in assessing your operational efficiency and profitability. Operating expenses are also fully tax-deductible in the period they're incurred, making accurate tracking essential for maximizing deductions.

What is included in operating expenses?

Operating expenses fall into two main categories: selling expenses and general and administrative (G&A) expenses. Selling expenses cover costs related to sales and marketing efforts, while G&A expenses are the costs required to run the overall business. Other common OpEx categories include R&D, repairs, and maintenance.

Rent and facilities costs

These are the monthly lease payments for office or retail space, property maintenance fees, and other facility-related expenses required to house your business operations. Rent is typically one of your largest fixed costs and stays consistent regardless of how much revenue you generate.

Salaries and wages

Payroll for non-production employees is often the single largest operating expense. This includes compensation for administrative staff, sales teams, management, and any other employees not directly involved in making your product or delivering your service.

It also covers payroll taxes, health insurance premiums, retirement contributions, and other employee benefits. For most businesses, non-production payroll represents 15–30% of total revenue.

Utilities

These are the costs for electricity, water, internet, and phone services required to operate your business facilities. Unlike rent, utilities are considered variable expenses that fluctuate based on usage.

Office supplies and equipment

This category covers day-to-day supplies such as paper and ink, as well as software subscriptions and small equipment purchases that aren't considered large capital investments. Monthly or annual fees for business software, such as accounting systems, CRM tools, and project management platforms, have become a significant operating expense for most businesses.

Insurance

Business insurance protects your company from various risks and counts as an operating expense. This includes general liability, property insurance, workers' compensation, and professional indemnity coverage.

Marketing and advertising

These are the costs associated with acquiring customers, such as digital ad campaigns, trade shows, sales materials, and the creation of promotional content. Marketing spend can be fixed (annual brand campaigns) or variable (performance-based digital ads tied to specific campaigns).

Professional services and fees

These are costs for external expertise, including legal fees, accounting services, consulting engagements, and outsourced HR support. While you could hire full-time staff for these functions, many businesses find it more cost-effective to outsource them.

Operating expenses vs. non-operating expenses

Non-operating expenses are costs unrelated to your core business operations. While operating expenses keep your business running, non-operating expenses arise from financing decisions or one-off events. Non-operating expenses include:

• Interest on debt
• Losses from asset sales
• Lawsuit settlements
• Currency exchange losses
• Restructuring costs

This distinction matters because operating expenses directly reflect how efficiently you run your core business. Investors and lenders focus on OpEx to evaluate your company's operational health.

Both types of expenses appear on your income statement, but separating them provides a clearer picture of your operational efficiency when analyzing financial statements.

Operating expenses vs. capital expenditures

Capital expenditures (CapEx) are investments in long-term assets that benefit your business over multiple years, like buildings, vehicles, or major equipment. In contrast, operating expenses are consumed within the current accounting period.

Sometimes the line blurs. Replacing a broken office printer for $500 is OpEx, but installing a $50,000 commercial printing system is CapEx. The general rule: if it significantly improves or extends an asset's life beyond one year, it's likely CapEx.

Depreciation bridges both categories. While the initial purchase is CapEx, the monthly depreciation expense becomes an operating expense on your income statement.

Fixed and variable operating expenses

OpEx can be split into two main categories: fixed and variable expenses. Understanding the difference helps you forecast costs and identify where you have flexibility to cut spending.

Fixed operating expenses

Fixed operating expenses are costs that remain the same each period, regardless of your company's level of activity. You'll pay these whether business is booming or slow. Examples include:

• Rent
• Insurance premiums
• Salaried employee wages
• Software subscriptions

Variable operating expenses

Variable operating expenses are costs that change based on your company's level of business activity. These rise and fall with production volume, sales, or usage. They include:

• Sales commissions
• Shipping costs
• Marketing spend tied to specific campaigns
• Utility usage fluctuations

Some operating expenses can be either fixed or variable. For example, wages could be fixed or variable depending on whether an employee is paid hourly or receives a full-time salary.

How to calculate operating expenses

To calculate operating expenses, sum all the operating costs on your income statement for a given period. Make sure to exclude non-operating costs like interest and taxes, as well as COGS and depreciation.

OpEx = Payroll + Rent + Marketing + Utilities + Office Supplies + Insurance + Legal Fees + Other Operating Costs

Follow these three steps:

1. Identify all operating costs on your income statement. These are typically found under selling, general & administrative (SG&A) line items.
2. Sum all selling expenses and G&A expenses together. Include every recurring cost that supports your day-to-day operations.
3. Exclude COGS, interest, taxes, and depreciation from your calculation. These are reported separately on the income statement and aren't part of your core operating expenses.

You can also back into your operating expenses if you already know your revenue and operating income:

Operating expenses = Total revenue – Operating income – COGS

Where operating expenses appear on the income statement

Operating expenses are listed on the income statement below gross profit. You subtract them from gross profit to determine your operating income. The flow looks like this:

• Revenue
• Less: Cost of Goods Sold (COGS)
• = Gross Profit
• Less: Operating Expenses (SG&A)
• = Operating Income

Here’s an example income statement, with OpEx highlighted in yellow:

How operating expenses affect profitability

Operating expenses have a direct impact on your bottom line. Higher OpEx reduces your operating income and, consequently, your net profit. Lower OpEx improves profit margins, giving you more room to reinvest in growth or return value to stakeholders.

• Operating income: Calculated as gross profit minus operating expenses. This is the clearest measure of how profitably you run your core business.
• Operating expense ratio (OER): Calculated as OpEx / Revenue, this ratio measures your cost efficiency. A lower ratio means you're spending less to generate each dollar of revenue.

Say you run a marketing agency that generates $80,000 in revenue with $52,000 in OpEx:

Operating expense ratio = $52,000 / $80,000 = 0.65 or 65%

This means 65% of your revenue covers operating costs, leaving 35% for profit and taxes.

A "good" OER depends on your industry and growth stage. Generally, a lower OER is better because it signals stronger operational efficiency. However, a higher OER might be justified if you're investing heavily in growth. For mature businesses, SG&A should account for roughly 15–25% of revenues. Fast-growing companies like SaaS startups often run higher (30–50%) due to sales and marketing investments, while manufacturers run lower (10–15%).

Tax treatment for operating expenses

Operating expenses are fully tax-deductible in the period they're incurred, which reduces your taxable income for that year. This is a key contrast with capital expenditures, which must be capitalized and depreciated over the asset's useful life.

For example, if you spend $10,000 on marketing this quarter, you can deduct the full amount on this year's tax return. But if you purchase a $50,000 piece of equipment, you'd spread that deduction across several years through depreciation.

Accurate tracking of every operating expense is essential for maximizing your tax deductions. Missing or miscategorized expenses mean you could be leaving money on the table at tax time.

How to reduce operating expenses

Effective expense management is critical for your company's financial health. The key is distinguishing between costs that generate returns and those that don't add value. Here's how to cut costs without sacrificing competitiveness.

Gain real-time spend visibility

You can't reduce what you can't see. Track spending across all categories in real time to identify areas of waste and opportunities for savings. Expense management tools can provide this visibility automatically, replacing the guesswork of monthly spreadsheet reviews with live dashboards.

Automate expense tracking and categorization

Manual expense processes are time-consuming and prone to errors. Automating the tracking and categorization of expenses gives you accurate records and allows for faster reporting and analysis. This also frees up your finance team to focus on higher-value work instead of chasing receipts.

Renegotiate vendor contracts

Review recurring contracts with vendors on an annual basis. You may be able to consolidate vendors or negotiate better terms and pricing based on your business volume or loyalty. Even small improvements, like a 5% discount on a major supplier contract, can add up to meaningful savings over time.

Eliminate redundant subscriptions and services

Research suggests businesses waste up to 50% on unused SaaS. Regularly audit all software subscriptions and services your company pays for. Cancel any tools that are unused and look for opportunities to consolidate overlapping subscriptions to reduce costs.

How Ramp helps you optimize OpEx

Tired of reconciling expenses manually or overspending on hidden costs? Ramp's all-in-one expense management software automates expense tracking and reporting, helping you manage and reduce your operating costs in a targeted way.

Ramp Intelligence uses AI to suggest cost-saving opportunities, like whether you're paying too much for software subscriptions. Ramp also offers integrations with leading accounting solutions like QuickBooks, NetSuite, and Sage Intacct to help you identify unnecessary spending and take control of your business's cash flow.

Ready to learn more? See a demo to learn how over 50,000 businesses have saved more than $10 billion and 27.5 million hours with Ramp.