In this article
You might like
No items found.
Spending made smarter
Easy-to-use cards, spend limits, approval flows, vendor payments —plus an average savings of 5%.1
|
4.8 Rating 4.8 rating
Error Message
No personal credit checks or founder guarantee.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Get fresh finance insights, monthly
Time and money-saving tips,
straight to your inbox
|
4.8 Rating 4.8 rating
Thanks for signing up
Oops! Something went wrong while submitting the form.
Table of contents

Understanding operating expenses can help your business plan its budgets, forecast future expenses, and allocate resources where they are needed most.

In this article, we’ll explain what operating expenses are, how to calculate them, and how to cut down on unnecessary costs.

What are operating expenses?

Operating expenses, also known as OpEx, are the costs associated with day-to-day operational activities of a business. These expenses include things like rent, utilities, salaries, wages, office supplies, overhead costs, property taxes, marketing costs, legal fees, and depreciation. 

Fixed vs. variable operating expenses

Operating expenses can be divided into two categories: fixed and variable expenses.

Fixed operating expenses are costs that remain constant regardless of the level of goods or services a business produces or sells. Examples of fixed costs related to business operations include:

• Taxes

• Rent

• Salaries

• Insurance

Variable operating expenses are costs that fluctuate in direct proportion to the level of production or sales activity within a business. Examples of variable operating expenses include:

• Raw materials

• Shipping and freight

• Direct labor costs

• Commissions

Some operating expenses can fluctuate between fixed and variable expenses. Wages can be fixed or variable, depending on whether the employee is paid hourly or receives a full-time salary. If the employee is salaried, their pay will be considered a fixed operating expense because it’s consistent. Hourly salaries, on the other hand, are a variable expense because they fluctuate based on the number of hours worked.

TIP
Is salary an operating expense?
Yes, salaries are considered an operating expense. They fall under the category of labor costs, which are a significant part of the expenses incurred in the daily operations of a business.

Operating expenses vs. non-operating expenses

So, what isn’t an operating expense? While operating expenses are costs that a business incurs to remain functional, non-operating expenses are any costs that are not tied to a business’s day-to-day operations.

Examples of non-operating costs include interest expenses on loans, losses on the sale of assets, lawsuit settlements, and income tax expenses.

OpEx vs. CapEx

Sometimes, operating expenses (OpEx) are distinguished from capital expenditures (CapEx). Capital expenditures are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, or equipment.

Examples of capital expenditures include:

• Real estate

• Equipment

• Furniture

• Intellectual property

• Copyrights

• Patents, trademarks, etc.

Capital expenses like intellectual property, copyrights, and patents will protect your business in the long term; they don’t immediately impact your day-to-day operations. Conversely, operational expenses like marketing costs do have an impact on your day-to-day operations. Striking a balance between these two types of expenses can move your business toward profitability.‍

Are operating expenses on the balance sheet or income statement?

Operating expenses are recorded on a company’s income statement, not the balance sheet. That said, operating expenses have an effect on both financial statements.

On the income statement:

Operating expenses are subtracted from gross profit to calculate operating income.

They're usually listed separately from cost of goods sold (COGS) and are categorized under headings like Selling, General and Administrative Expenses (SG&A), Research and Development (R&D), and Depreciation and Amortization.

Effect on the balance sheet:

While operating expenses themselves do not appear on the balance sheet, they do impact the net income of the company, which in turn affects the equity section of the balance sheet.

For example, if operating expenses increase, net income will decrease (assuming all other factors remain constant), which will then decrease retained earnings, a component of shareholders' equity on the balance sheet.

In summary, operating expenses are a crucial part of the income statement that helps investors and management understand the cost structure of your company and its profitability from operations.

What is the formula for operating expenses?

A few different formulas can help you calculate your operating costs. The most straightforward way is to add together all of your operating expenses for a final sum. One example formula for operating expenses is:

Operating Expenses = Wages + Rent + Utilities + Insurance + Marketing

Each business operates differently. Your operating expenses could include more items than listed in this specific formula. It is vital to identify your operating expenses and then add them together for a final sum.

Once you've calculated your operating expenses, you can calculate your operating expense ratio. Your operating expense ratio is a good indicator of your business's efficiency. A low operating expense ratio is typically indicative of an efficient company. A high operating expense ratio is usually a sign of inefficient business practices. The following formula represents your operating expense ratio:

Operating Expense Ratio = Operating Expense / Total Revenue

What is a good operating expense ratio?

A good Operating Expense Ratio (OER) largely depends on your company’s industry and growth strategy. Generally, a lower OER is preferable as it indicates better operational efficiency, meaning your company is able to generate more revenue per dollar of operating expense.

Sometimes, a higher OER might be justified if a company is investing heavily in growth or operational improvements, which could lead to higher future revenues and profitability. It's important to analyze the OER in the context of industry norms, historical trends, and your company's growth strategy to determine whether you feel it’s at a reasonable level.

The impact of operating expenses on your bottom line

As a business owner, managing your operating expenses effectively is critical to remaining profitable.

High operating costs can improve the quality of your operation, helping you attract more customers and grow your business. However, your profit margin will shrink if you spend too much on operational expenses.

Low operating costs can save your business money and improve your bottom line. But then, it may become harder to operate efficiently. Establishing financial health and creating an operating budget to account for spending will help keep your business expenses in check.

Manage your operating expenses with Ramp

Ramp’s expense management software can help you manage and cut down on your operating costs. Our platform has integrations with leading accounting solutions like Quickbooks to help you control unnecessary spending and take control of your business's cash flow.

Learn more about how Ramp can help your business save.

Try Ramp for free
Error Message
No personal credit checks or founder guarantee.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Finance Writer and Editor, Ramp
Ali Mercieca is a Finance Writer and Content Editor at Ramp. Prior to Ramp, she worked with Robinhood on the editorial strategy for their financial literacy articles and with Nearside, an online banking platform, overseeing their banking and finance blog. Ali holds a B.A. in Psychology and Philosophy from York University and can be found writing about editorial content strategy and SEO on her Substack.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.

FAQs

How Mindbody & Classpass saved time, enhanced visibility, and improved usability with Ramp

“We were going to hold office hours, but it was so quiet that we never needed to. All the feedback was positive -- it was very easy to roll out.”
Heather Bruzus, Principal Accountant, Mindbody & Classpass

How Rarebreed Veterinary Partners Prepared for Scale with Ramp

“I can look in Ramp and see my spend for the month immediately. I don’t have to go on 14 different platforms. It’s all right there.”
Eric Chabot, VP of Accounting & Controller, Rarebreed Veterinary Partners

How Tomo drove efficiency and slashed time to close with Ramp

"Bringing our close timeline down by half has given us so much more time for projects and analysis.”
Eric Ho, SVP, Head of Finance, Tomo

How Crowdbotics streamlined, centralized, and saved with Ramp

“We switched from our legacy provider to Ramp in under a week and heard zero complaints."
Miles Lavin, VP of Strategic Finance, Crowdbotics

How Ramp Helped REVA Air Ambulance Save Time, Improve Visibility, and Gain Peace of Mind

“We were able to mold Ramp to our company to set it up as needed within departments. But the biggest selling feature to us was the automatic, real-time integration with Sage.”
Seth Miller, Controller, REVA

How Heyday Skincare gained control over 23+ entities with Ramp

“Ramp has been a saving grace by organizing and consolidating systems and giving us real time visibility across 23 entities.”
Shawn Gordon, Sr. Accounting Manager, Heyday Wellness

How Ramp helped Rustic Canyon Restaurant Group promote a culture of financial awareness and responsibility

"Ramp has helped promote a culture of awareness and accountability, there's no swipe your card and forget about it, people are more attuned to why and how they are spending."
Derek Arnette, Controller, Rustic Canyon Restaurant Group