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 impacts your profitability and cash flow. This guide breaks down everything you need to know about operating expenses: what they are, how to calculate them, and, most importantly, how to optimize them for better financial performance.

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.

Fixed vs. variable operating expenses

OpEx can be split into two main categories: fixed and variable expenses.

• Fixed operating expenses are costs that remain constant regardless of business activity or production. Examples of fixed costs related to business operations include taxes, rent, insurance, most salaries, marketing and advertising costs, and others.
• Variable operating expenses are costs that fluctuate in direct proportion to the level of production or sales activity within your business. Examples of variable costs include utilities, shipping and freight, sales commissions, and credit card processing fees.

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.

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.

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.

Here’s a closer look at operating vs. non-operating expenses:

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.

Common types of operating expenses

Operating expenses fall into several standard categories. Here are some of the most common types you'll find on an income statement:

Payroll

Payroll for non-production employees is often one of the largest operating expenses. This includes salaries, wages, and benefits for any staff that isn’t directly involved in making your product or delivering your service.

Examples include:

• Salaries for managers, salespeople, and administrative staff
• Payroll taxes and health insurance premiums
• Retirement contributions and other employee benefits

For most businesses, non-production payroll represents 15–30% of total revenue.

Rent and utilities

These are costs associated with maintaining and operating your physical workspace or facilities. They include office rent, electricity, water, internet, and phone services.

Rent is typically a high fixed cost, while utilities are considered variable expenses that fluctuate based on usage.

Software subscriptions

Monthly or annual fees for business software have become a significant operating expense for most businesses. This includes accounting systems, CRM tools, project management platforms, and other productivity applications.

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.

Maintenance and repairs

These costs keep your existing assets functional without adding value. This category covers ongoing upkeep of office equipment, building repairs, and routine maintenance that doesn't extend an asset's useful life, like HVAC servicing or printer repairs.

Depreciation and amortization

These non-cash expenses represent the allocated cost of tangible and intangible assets over their useful life. While you pay for these assets up front, accounting rules require you to spread out the expense over time.

Examples include fleet vehicle depreciation, IT hardware depreciation, and amortization of purchased software licenses.

How operating expenses are categorized

Most income statements organize OpEx into functional categories to help you understand where your money is going. This makes it easier to benchmark against competitors and identify areas where you might be overspending.

Selling, general, and administrative (SG&A) expenses

SG&A expenses are the combined costs of running your business and acquiring customers. They’re often grouped together, but you can break them down further:

• Selling expenses: Sales salaries and commissions, advertising campaigns, trade show costs, and sales materials
• General expenses: Office rent, utilities, insurance, office supplies, and professional fees
• Administrative expenses: Executive salaries, accounting and legal fees, HR costs, and IT support

Research and development (R&D)

R&D expenses include investments in product innovation, design, or process improvements—especially relevant for tech, biotech, or manufacturing companies. Many R&D expenses also qualify for tax credits, helping to offset their cost.

Some specific examples include:

• Product development salaries
• Testing and prototyping
• R&D software and equipment
• Technical consulting or lab services
• Intellectual property development

How to calculate operating expenses

There are a couple different formulas you can use to calculate your total operating expenditures. The most straightforward method is to add all your operating expenses to arrive at a total sum:

Operating expenses = SG&A + Depreciation + Amortization + Other operating costs

Each business operates differently, so your operating expenses could include more items than those listed in this specific formula. It’s essential to first identify all your operating expenses before totaling them for your final sum.

Another simple way to calculate your operating expenses is to subtract your operating income and COGS from your total revenue:

Operating expenses = Total revenue – Operating income – COGS

Operating expense ratio and how to use it

Once you've calculated total OpEx, you can calculate your operating expense ratio (OER) to measure how efficiently you manage expenses relative to revenue. The OER formula is:

Operating expense ratio = Operating expenses / Total revenue

Say you have a marketing agency that generates $80,000 in revenue with $52,000 in OpEx. Here’s how you’d calculate OER:

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

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

A good operating expense ratio largely depends on your company’s industry and growth strategy. Generally, a lower OER is ideal because it indicates better operational efficiency, which means your company generates more revenue per dollar of OpEx. However, a higher OER might be justified if your company is investing heavily in growth or operational improvements.

Where to find operating expenses on your income statement

You record operating expenses on your company’s income statement. You’d subtract operating expenses from your gross profit to calculate your operating profit.

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

Operating expenses are highlighted in yellow on this fictional income statement.

Common operating expense benchmarks

Operating expense ratios can vary significantly by industry, but general guidelines can help you assess your spending.

Generally speaking, for mature businesses, SG&A should account for roughly 15–25% of your revenues, depending on industry. Fast-growing companies like SaaS startups often run higher (30–50%) due to sales and marketing investments, while manufacturers run lower (10–15%).

When benchmarking, consider these factors:

• Company growth stage: Startups spend more on growth than mature companies
• Business model: Service businesses tend to have higher OpEx ratios than product businesses
• Geographic location: Costs vary significantly by region
• Competitive environment: Competitive markets often require more marketing spend

How to manage and reduce operating expenses

Effective expense management is critical for your company’s financial health. Low operating costs can save your business money and improve your bottom line, but this could also make it harder to operate, which impacts your competitiveness.

10 ways to reduce OpEx without hurting growth

High operating costs can improve the quality of your operations, helping you attract more customers and remain competitive in the market. However, your profit margin will shrink if you spend too much on operational expenses.

The key is distinguishing between costs that generate returns and those that don't add value. Here’s how to strike a balance between reducing operating costs and remaining competitive:

1. Automate repetitive tasks: Replace manual processes like invoicing, payroll, and expense tracking with software to save hours of administrative work
2. Negotiate vendor contracts: Review and renegotiate supplier agreements annually. Bundling services or switching providers can yield significant savings.
3. Embrace remote work: Reduce office space requirements by allowing remote or hybrid work. Even a small downsizing can save thousands in rent and utilities.
4. Audit subscriptions and services: Research suggests businesses waste up to 50% on unused SaaS. Cancel unused software, memberships, and other recurring charges.
5. Optimize energy usage: Install LED lighting, programmable thermostats, and energy-efficient equipment to reduce utility costs
6. Outsource non-core functions: Consider outsourcing accounting, IT support, or customer service to specialized providers for better results at lower costs
7. Implement zero-based budgeting: Start each budget period from zero, justifying every expense rather than automatically renewing previous allocations
8. Use technology for communication: Replace travel with video conferencing when possible. A single eliminated business trip can save thousands.
9. Buy in bulk and negotiate payment terms: Purchase frequently-used supplies in bulk and ask vendors for early payment discounts
10. Cross-train employees: Develop versatile team members who can cover multiple roles, reducing the need for specialized hires or temporary staff

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 why over 50,000 businesses have saved more than $10 billion and 27.5 million hours with Ramp.