Operating Expense

Beginner

Also known as: Operating Expenditure (OpEx), Operating Expenditure, OpEx

An operating expense is a cost a business incurs in running its day-to-day operations that is not directly tied to producing its goods, such as rent, salaries, marketing, utilities and administration.

Operating expenses are the ongoing costs of keeping the business going. They appear on the income statement below gross profit. Subtracting them from gross profit gives operating income.

Typical operating expenses include selling expenses, such as advertising and sales staff; general and administrative expenses, such as office rent, finance and HR teams; and research and development. Depreciation of office equipment and buildings is also often included.

For example, if a company has gross profit of 500,000 and operating expenses of 380,000, its operating income is 120,000.

Operating expenses differ from capital expenditure. Operating expenses are recorded in full in the period they are incurred, because they relate to current operations. Capital expenditure, such as buying a new building, creates a long-term asset whose cost is spread over many years through depreciation.

Keeping operating expenses under control is a key way businesses protect their profits, especially when sales growth slows.

Note: Operating expenditure, often shortened to OpEx, means the same as operating expense. It is commonly used when contrasting day-to-day costs with capital expenditure (CapEx).

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