Operating expenses (OpEx) are costs related to normal business operations. Operating expenses are essential for a business to run on a daily basis.
Managing operating expenses
Part of owning a business is maximising profit while minimising operating costs. Managing operating expenses involves striking a balance: if you cut costs too much, you could cut corners and compromise the quality of your goods and services, but if you leave costs unchecked, it could hamper your profitability.
Fixed and variable costs
Operational expenses are divided into two departments: fixed costs and variable costs incurred.
Examples
| Fixed costs | Variable costs |
|---|---|
| office supplies | raw materials |
| rent | cost of labour |
| insurance | sales commissions |
| employee salaries | credit card fees |
| marketing expenses | freight and shipping |
| administrative expenses | utility costs |
| property taxes |
Operating expense ratio
To calculate your operating expense ratio, add all your business’s operating expenses to your cost of goods sold (COGS) and divide by your net sales.
The lower your operating expense ratio, the more efficiently you manage business costs. A higher OER will provide you with an opportunity to find areas where you can reduce your costs to run a more efficient business operation.
Non-operating expenses
Non-operating expenses are costs that have been incurred and don’t fit either operating expenses or capital expenses. These appear below operating expenses on the balance sheet. Some examples include:
- Interest expenses
- Inventory write off
- loss on asset sales
Operating expenses (opex) vs capital expenditures (Capex)
While operating expenses are typically recurring, capital expenditures are investments in either physical or intangible assets designed to provide growth opportunities for a business.
Capital expenditures are related to how your business can generate income over time, whereas operating expenses indicate your business’s financial health.
