Operating Expense
Last reviewed 2026-05-11 by Asad Ali, Founder & CEO
Day-to-day costs of running a business.
Operating expenses (OpEx) are the costs of running daily business operations, excluding cost of goods sold and non-operating items like interest and taxes. They are commonly grouped into Selling, General, and Administrative (SG&A) expenses and include rent, utilities, office salaries, marketing and advertising, insurance, office supplies, professional services (legal, accounting), travel, software-as-a-service subscriptions, and depreciation of office assets. OpEx is fully deducted from revenue in the period incurred (immediate expense), unlike capital expenditures (CapEx) which are capitalized to the balance sheet and depreciated over multiple years. On the income statement, OpEx sits between gross profit and operating income; the relationship is Operating Income = Gross Profit − Operating Expenses.
Formula
Operating Expenses = Selling, General & Administrative Expenses + R&D + Depreciation & Amortization on Operating Assets (excludes COGS, interest, and taxes). Operating Income = Revenue − COGS − Operating ExpensesExample
A digital agency has $45,000/month in operating expenses: $20,000 office salaries (admin, design, project management), $5,000 rent, $8,000 software (Adobe, Figma, Slack, HubSpot, Google Workspace, QuickBooks), $7,000 marketing (paid ads, sponsorships, content), $3,000 utilities and internet, and $2,000 insurance. With $90,000 monthly revenue and $25,000 in COGS (freelance contractors directly billable to client projects), Gross Profit = $65,000, Operating Income = $65,000 − $45,000 = $20,000. Operating margin = 22.2%.
Why It Matters for Your Business
Operating expenses are the costs between gross profit and net profit, so controlling them is often the most direct lever for improving profitability.
Practical Tips
- •Categorize OpEx by department or function — aggregate totals hide which area is bloating
- •Review every recurring software subscription quarterly and cancel anything used by fewer than 3 people or in fewer than 2 of the last 4 weeks
- •Track OpEx as a percentage of revenue, not absolute dollars — growing businesses should see this ratio decline as fixed OpEx leverages over a larger revenue base
- •Reclassify costs that are really CapEx (multi-year benefit) to the balance sheet — expensing them upfront understates assets and overstates the current period's expenses
Common Questions About Operating Expense
How is operating expense calculated?
The formula is: Operating Expenses = Selling, General & Administrative Expenses + R&D + Depreciation & Amortization on Operating Assets (excludes COGS, interest, and taxes). Operating Income = Revenue − COGS − Operating Expenses. See the worked example below for a step-by-step calculation using realistic numbers.
What is an example of operating expense?
A digital agency has $45,000/month in operating expenses: $20,000 office salaries (admin, design, project management), $5,000 rent, $8,000 software (Adobe, Figma, Slack, HubSpot, Google Workspace, QuickBooks), $7,000 marketing (paid ads, sponsorships, content), $3,000 utilities and internet, and $2,000 insurance. With $90,000 monthly revenue and $25,000 in COGS (freelance contractors directly billable to client projects), Gross Profit = $65,000, Operating Income = $65,000 − $45,000 = $20,000. Operating margin = 22.2%.
Why does operating expense matter for my business?
Operating expenses are the costs between gross profit and net profit, so controlling them is often the most direct lever for improving profitability.
How does FiscalInsights help with operating expense?
FiscalInsights tracks operating expense automatically as part of its AI bookkeeping workflow. Connect your bank accounts and the platform handles categorization, reconciliation, and reporting without manual entry.
More Business Terms
Accounts Reconciliation
Ensuring account balances match between different records.
Break-Even Point
The sales volume at which total revenue exactly equals total costs — neither profit nor loss.
Financial Statements
Reports summarizing financial performance and position.
Fixed Costs
Expenses that remain constant regardless of production.
Variable Costs
Expenses that change with production or sales volume.
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