Operating Expenses (OpEx): Definition, Examples and Formula

Quick answer: Operating expenses (OpEx) are the costs of running a business day to day that are not part of the direct cost of the goods or services sold, such as rent, salaries, software, marketing and insurance. The basic formula is: operating expenses = revenue − cost of goods sold − operating profit.

Every business has a set of costs that keep the lights on whether it sells one unit or a thousand. Knowing exactly what those costs are, and how they compare with revenue, is one of the fastest ways to understand whether a business can grow profitably. This guide defines OpEx in plain language, lists common examples by category, shows two ways to calculate the total with a worked example, and explains the classification mistakes that make profit look better or worse than it really is.

A quick note on scope: our free invoice generator creates PDF invoices in your browser. It does not track spending or produce financial reports, so for the calculations below you will use your bookkeeping software or a spreadsheet.

What are operating expenses?

Operating expenses are the ongoing costs a business incurs to carry out its normal activities, other than the direct cost of producing what it sells. Accountants often call them overhead, indirect costs, or selling, general and administrative expenses (SG&A).

Three ideas define the category:

• They support operations. Rent, admin salaries and marketing exist to run and grow the business, not to build a specific product.
• They are used up within the period. A month of rent or a year of software is consumed and expensed in that period, unlike equipment that lasts for years.
• They sit below gross profit. On a multi-step profit and loss statement, OpEx is subtracted from gross profit to arrive at operating profit.

That last point matters. Revenue minus cost of goods sold gives gross profit, which shows how profitable each sale is. Subtracting operating costs from gross profit shows whether the business as a whole earns enough to cover its overhead.

Operating expenses examples by category

The categories below are typical for a small business. Your chart of accounts may group them differently, and that is fine as long as you use the same groups every month.

Category	Typical examples	Usually fixed or variable?
Premises	Rent, lease payments, utilities, cleaning, repairs and maintenance	Mostly fixed
People	Salaries for admin, sales and management staff, payroll taxes, benefits, training, recruiting	Mostly fixed
Sales and marketing	Advertising, website, sales commissions, trade shows, promotional materials	Mixed
Technology	Software subscriptions, hosting, phones, internet, IT support	Mostly fixed
Professional services	Accounting, bookkeeping, legal fees, consultants	Mixed
Insurance	General liability, professional indemnity, property, cyber	Fixed
Administrative	Office supplies, postage, bank fees, payment processing fees, licenses	Mixed
Travel	Business travel, mileage, lodging	Variable
Non-cash	Depreciation and amortization on operating assets	Fixed

The fixed-or-variable column is a simplification; the split between the two is explained in our guide to fixed vs variable costs. It is worth knowing because fixed overhead is what drives your break-even point.

What is not an operating expense

• Cost of goods sold: inventory, raw materials, direct production labor and freight in.
• Capital expenditures: buying equipment, vehicles, buildings or major improvements. These go on the balance sheet. See CapEx vs OpEx for where the line falls.
• Interest expense: the cost of borrowing is a financing cost shown below operating profit.
• Income tax: shown at the bottom of the income statement, or paid personally by owners of pass-through businesses.
• Loan principal repayments and owner draws: these move cash but are not expenses at all.
• Sales tax or VAT collected: money held for the government is a liability, not income or expense.

The operating expense formula

There are two common ways to get the total. Use whichever matches the data you have.

Method 1: add up the categories

OpEx = rent + salaries + utilities + insurance + marketing + software + professional fees + depreciation + other overhead

This bottom-up approach is what your bookkeeping software does when it totals every expense account classed as overhead.

Method 2: work back from the income statement

OpEx = revenue − cost of goods sold − operating profit

This is useful when you are reading someone else's financial statements and only the subtotals are shown.

Related ratios

• Operating expense ratio = total OpEx ÷ revenue. It shows how much of each sales dollar goes to overhead.
• Operating margin = operating profit ÷ revenue. It shows how much of each sales dollar is left after both direct costs and overhead.

Worked example: calculating OpEx for one quarter

Here is an illustrative example for a fictional online homeware shop. The numbers are invented to show the arithmetic and are not benchmarks.

Line	Amount
Revenue	$90,000
Cost of goods sold	($40,500)
Gross profit	$49,500
Warehouse rent	($7,500)
Staff wages and payroll taxes	($18,000)
Advertising	($6,300)
Software and hosting	($1,350)
Payment processing fees	($2,250)
Insurance	($900)
Accounting fees	($1,200)
Depreciation on equipment	($750)
Total operating expenses	($38,250)
Operating profit	$11,250

The arithmetic:

• Gross profit: $90,000 − $40,500 = $49,500 (a 55% gross margin, since $49,500 ÷ $90,000 = 0.55).
• Method 1 total: $7,500 + $18,000 + $6,300 + $1,350 + $2,250 + $900 + $1,200 + $750 = $38,250.
• Operating profit: $49,500 − $38,250 = $11,250.
• Method 2 check: $90,000 − $40,500 − $11,250 = $38,250. Both methods agree.
• Operating expense ratio: $38,250 ÷ $90,000 = 42.5%.
• Operating margin: $11,250 ÷ $90,000 = 12.5%.

What the owner learns: wages are the largest overhead line at 20% of revenue ($18,000 ÷ $90,000), and advertising is 7%. If the shop wants a higher operating margin, it can either grow revenue faster than overhead or trim specific lines. Cutting advertising by a third would save $2,100 a quarter, but only makes sense if it does not cost more than $2,100 in lost gross profit. Measuring that trade-off is what the ROI formula is for.

Why tracking OpEx matters

• Break-even planning. Fixed overhead divided by contribution margin per unit tells you how many sales you need before you make a profit.
• Pricing. Prices must cover direct costs and a fair share of overhead, or each sale quietly loses money.
• Budgeting. Overhead is the most predictable part of spending, which makes it the backbone of a small business budget.
• Cash planning. Rent, payroll and subscriptions are due whether or not customers have paid their invoices. Getting invoices out promptly, with clear payment terms, shortens the gap between paying overhead and collecting cash.
• Tax. In the US, ordinary and necessary business costs are generally deductible. The IRS lists the expense lines a sole proprietor reports in the Instructions for Schedule C, which is a handy reference for categories even if you are not a sole proprietor.

How to track and review your overhead: a checklist

• Set up separate expense accounts for each major overhead category, distinct from cost of goods sold.
• Use a dedicated business bank account and card so every cost has a record.
• Keep receipts and supplier invoices, and file them by month. Our guide on how to track business expenses covers simple systems.
• Categorize transactions weekly rather than at year end.
• Reconcile bank and card statements every month.
• Record depreciation monthly or quarterly so profit is not overstated until year end.
• Calculate total overhead, the operating expense ratio and operating margin each month.
• Compare each line with last month and the same month last year; investigate any big change.
• List every recurring subscription with an owner and renewal date.
• Review contracts (rent, insurance, software, phone) at least once a year before renewal.

How to reduce operating costs without hurting growth

Lowering overhead is not always the right goal; some spending, such as marketing that brings in profitable customers, pays for itself. A sensible review looks like this:

1. Rank lines by size. Focus on the three or four biggest categories first. Trimming a $30 tool saves less than renegotiating a lease.
2. Separate essential from discretionary. Insurance and rent are hard to avoid; unused software seats and duplicate tools are not.
3. Measure return where you can. Track the gross profit each marketing channel produces before cutting it.
4. Convert fixed to variable. Contractors, usage-based software and shared workspace can lower risk when sales are uneven.
5. Automate low-value admin. Templates, standard documents and consistent invoice numbering reduce time spent on paperwork. A ready-made invoice template is one small example.

Common mistakes with operating expenses

• Mixing COGS and overhead. Putting inventory purchases in operating expenses, or rent in COGS, distorts both gross margin and operating margin.
• Expensing capital purchases. Recording a $6,000 machine as an office expense makes one month look terrible and later months look too good. Capitalize it and depreciate it; our guide on how to calculate depreciation shows the methods.
• Treating owner draws as expenses. For a sole proprietor, money taken out is a draw from equity, not an operating cost.
• Including loan principal. Only the interest portion of a loan payment is an expense, and it sits below operating profit.
• Counting sales tax collected as income and remittances as expenses. It inflates both lines and can be misreported.
• Ignoring annual costs. Insurance or software paid once a year should be spread across the months it covers if you produce monthly statements.
• Changing categories often. Moving costs between accounts breaks month-to-month comparisons.
• Cutting blindly. Slashing marketing or customer service can lower overhead and revenue at the same time.

OpEx, profit and the bigger picture

Operating costs are one layer in the profit picture. Revenue minus COGS gives gross profit; gross profit minus overhead gives operating profit; and operating profit after interest and tax gives net profit. Our explainer on gross profit vs net profit walks through each layer. If you are self-employed, also review the list of self-employed tax deductions so legitimate business costs are not missed at tax time.

Keep operating expenses grouped consistently, review them monthly against revenue, and treat every cut as a trade-off with growth rather than a goal in itself. Done that way, overhead becomes a tool for planning instead of a surprise at year end.