Business Glossary

What is an Operating Expense?

An operating expense is an expense that is related to a business’s core operations. Operating expenses (OPEX) are the first expenses shown on a company’s profit and loss statement. The amount left over after operating expenses have been deducted from gross revenue is known as operating income.

Examples of operating expenses

Operating expenses can generally be split into four broad categories. These are:

  • Overhead costs
  • Cost of goods sold (products)
  • Cost of revenue (services)
  • Selling, general and administrative expenses

The term overhead costs refers to the fixed operating costs businesses must pay regardless of their output. These are generally much the same for all companies. They include:

  • Rent/mortgage
  • Utilities
  • Certain types of insurance
  • Core labour costs (contracted, permanent employees)

The terms cost of goods sold and cost of revenue refer to the operating costs that are directly connected to the production of goods or services. These would typically include:

  • Equipment and supplies
  • Non-core labour (such as fixed-term employees and freelancers and/or overtime pay for employees)
  • Additional insurance (to cover increased production)
  • Selling, general and administrative expenses

This can include anything from sales, advertising and marketing to distribution costs to research and development. Many selling, general and administrative expenses are also overhead costs.

Operating expenses vs non-operating expenses

Non-operating expenses are expenses that do not relate directly to the business’s core operations. The most common examples of non-operating expenses are interest, taxes, depreciation and amortisation. Less common non-operating expenses can also include inventory write-offs, restructuring costs and even settlements for lawsuits.

Operating expenses in accounting

In accounting, a company’s gross profit is shown as the first line item on the profit and loss statement. Its operating expenses are shown immediately after this. Deducting the operating expenses from the gross income gives the operating income.

Non-operating expenses are shown next. Once these costs have been deducted, from the company’s operating income the money left over is the company’s net income or net profit.

The net profit can be used to calculate the net profit margin. The calculation for this is:

Net Profit/Total Revenue = Net Profit Margin

The significance of operating expenses

In the real world, there are two important facets to managing operating expenses successfully. The first is knowing when to spend and when to save. The second is knowing how to spend.

Spending vs saving

Businesses that compete purely on price may benefit from paring back costs to an absolute minimum. Most businesses, however, compete on value for money. This means they need to keep their costs as low as they reasonably can without compromising on quality.

There are two main strategies businesses commonly use to achieve this. Firstly, they look to get maximum value out of every purchase they make. This means thinking carefully about what they need and want and looking for the most cost-effective way to get it.

Businesses will generally try to make themselves valuable customers to their suppliers. For example, they will usually try to make fewer, larger orders to benefit from volume pricing. They may order well in advance and possibly make a down payment to secure their goods (or services).

Secondly, they always look for more efficient ways to do what they do. For example, businesses are increasingly using technology to reduce their payroll costs without compromising performance.

Knowing how to spend

For many businesses, the desire to achieve maximum value for money on each purchase has to be balanced against the need to maintain reliable cash flow. This can mean that companies make smaller purchases even though they know that buying in volume would be more economical.

Alternatively, they may avoid buying items and lease or rent them instead. This can work out more expensive in the long run. The additional expense can, however, often be justified by the extra flexibility, improved cash flow and ability to keep cash in hand on the balance sheet.

This article is for informational purposes only and does not constitute legal, employment, tax or professional advice. For specific advice applicable to your business, please contact a professional.

Explore how Square can help you run your business.

Appointments POS

The point-of-sale solution for bookings, payments, retail, inventory, and more.

Ecommerce platform

Turn any business into an online business with a free eCommerce website.

Invoicing software

Square Invoices are free to create and send. Easily send customised online invoices, estimates, and recurring payments with Square.

EFTPOS machine

Square Terminal is your all-in-one credit card and eftpos machine for payments and receipts. It’s secure, reliable and an entirely fairer way to get paid.

Point of Sale Software

Square Point of Sale makes it easy to sell in person, online, over the phone or out in the field. It’s simple to use, and there’s no training required

Restaurant POS

An all-in-one restaurant POS system built to help owners, managers, and staff make the most of every shift.

Retail POS

Square for Retail streamlines your business and keeps everything synced across in-store and online sales, inventory, purchase orders, Customer Directory, and advanced reports.

Tap to Pay on Android™

Accept contactless payments on NFC-enabled devices. Download the Square POS app to start taking payments with just your phone.


Take contactless payments with just your Android phone.

Accept contactless cards and digital wallets with Tap to Pay on Android.

Get business insights and hear more about Square.

Join our email list to receive stories from business owners, industry tips, new product information, and more.

By providing your information you agree to receive marketing communications from Square. Please visit Square’s Privacy Policy for further information.