Operating Expense

Operating Expenses (OpEx): Definition, Examples, and Management

What is an operating expense?

An operating expense (OpEx) is a cost a business incurs through its normal, day-to-day operations to generate revenue. OpEx is distinct from capital expenditures (CapEx), which fund the acquisition or improvement of long‑lived assets, and from non‑operating expenses, which are unrelated to core business activities.

Common examples

• Rent and utilities
• Salaries and wages (payroll)
• Marketing and advertising
• Insurance
• Office supplies and repairs
• Accounting and legal fees
• Sales and administrative expenses
• Cost of goods sold (COGS) for businesses that manufacture or resell products

Fixed vs. variable operating expenses

• Fixed OpEx: Costs that do not change with production levels (e.g., rent, insurance).
• Variable OpEx: Costs that fluctuate with production or sales volume (e.g., raw materials, sales commissions).
  Understanding the mix helps managers control spending and plan for changes in demand.

How OpEx appears in financial statements

Operating expenses are reported on the income statement and typically included in categories such as COGS, selling, general and administrative (SG&A), and depreciation and amortization. Interest expense and income taxes are generally treated as non‑operating items and reported separately.

OpEx vs. CapEx

• CapEx (capital expenditures) are investments in long‑term assets (property, equipment, software). These are capitalized on the balance sheet and depreciated or amortized over time.
• OpEx is recorded as an expense in the period incurred and generally deductible for tax purposes in that year.
  Example: Payroll of $100,000 is treated as an OpEx and expensed in the period; purchasing $100,000 of factory equipment is CapEx and is depreciated over its useful life.

OpEx vs. non‑operating expenses

Non‑operating expenses arise from activities not central to the company’s core business—common examples include interest expense on debt and losses on asset disposals. Analysts sometimes exclude non‑operating items to evaluate operating performance more clearly.

Tax treatment

Operating expenses are typically deductible in the year incurred if they are ordinary (common in the business’s trade) and necessary (helpful and appropriate). CapEx must usually be capitalized and deducted over time according to tax rules.

Strategies for managing operating expenses

• Track and categorize expenses regularly to identify trends.
• Differentiate fixed and variable costs to improve responsiveness to demand changes.
• Prioritize spending with a focus on return on investment (e.g., marketing or R&D that drives revenue).
• Negotiate supplier contracts and leases; consolidate vendors where beneficial.
• Automate processes and outsource non-core functions to reduce SG&A.
• Implement energy efficiency and preventive maintenance to lower utility and repair costs.
• Avoid indiscriminate cuts that harm product quality, customer experience, or growth capacity.

Key takeaways

• OpEx are routine costs of running a business and are essential for revenue generation.
• They are generally deductible in the year incurred if ordinary and necessary.
• Proper classification and management of OpEx (and its distinction from CapEx and non‑operating expenses) are critical for tax treatment, financial reporting, and maintaining competitive performance.
• Balancing cost control with investment in core capabilities preserves both efficiency and long‑term value.