What Are Operating Expenses? Definition and Examples

What Are Operating Expenses? Definition and Examples
Operating expenses are expenses that business owners incur in order to operate that business. Being able to regularly identify those expenses can help you better manage your cash flow and optimize operations.
by Deborah Findling Oct 19, 2023 — 3 min read
What Are Operating Expenses? Definition and Examples
This article is for educational purposes and does not constitute legal or tax advice. For specific advice applicable to your business, please contact a professional.

Business expenses, operating costs, operating expenses, operating budget — whatever you call the expenses you need to keep your business running, what matters most is how you identify and leverage that information. A recent CB Insights report cites running out of cash or failing to raise new capital (38% of respondents) as the number one reason why businesses fail. Other issues included being outcompeted, flawed business models, and regulatory or legal challenges. Many of these obstacles can be avoided by understanding your business costs and using that insight to plan ahead.

What are operating expenses?

Operating expenses are expenses that a business owner incurs in order to operate that business. These expenses can include rent, inventory costs, administration fees, or advertising expenses. These expenses will typically fall into two categories: fixed costs or variable costs. Fixed costs will remain consistent month over month and may include things such as rent or utilities. Variable costs can vary and may include things such as expenses from dining out or delivery costs. With so many different costs of doing business, it can be difficult to identify which are operating expenses for your business.

The importance of identifying operating expenses

Unlike other costs to your business, operating expense are necessary to keep your doors open, so knowing and understanding these expenses can help you manage your cash flow. Looking at the relationship between your operating expenses and your gross profit margins, for example, can signal whether you are pricing your goods and services efficiently. You can identify your operating expenses in several ways, such as by using software, by working with a professional, or by listing them with a pen and paper. 

Operating expenses and profitability

Identifying how much profit your business makes can inform the overall profitability of your business and when it could break even. Increases in operating expenses can lower profit and impact profitability. The sum of your expenses can help you better manage your business’s cash flow and what reinvestments you are able to make.

Role of operating expenses in financial analysis

Knowing your operating expenses, which is referred to as an operational expenditure (OPEX), can be used to compare expenses to income and help you forecast your business’s profitability. You can see operating expenses summarized in an income or profit-and-loss statement. This can also help you make decisions about whether any operating costs need to be cut.

Examples of operating expenses

Operating costs for a business are related to day-to-day business activities. These can include a range of expenses. They can also differ from industry to industry. Here are some examples to consider:

Strategies to reduce operating expenses

Calculating your operating expenses can be critical to budgeting and forecasting how you allocate your funds. This could be in the form of cutting costs, such as by automating certain processes, by reducing office supply, or by investing in upgraded software to streamline or replace what previously required staff or multiple software to accomplish.

By monitoring and analyzing your expenses regularly, you can find ways to cut costs that aren’t necessary for your day-to-day business operations or that perhaps can be spread out at longer intervals.

Deborah Findling
Deborah Findling is an editor at Square, where she writes about investment, finance, accounting and other existing and emerging payment methods and technologies.


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