Operating expenses (OpEx): Definition, examples, and formula

Understanding operating and nonoperating expenses can help your business plan budgets, forecast future spending, and allocate resources where they’re needed most.

In this article, we’ll explain the different types of operating expenses, how to calculate them, and how to cut down on unnecessary costs.

What are operating expenses?

On your financial statements, operating expenses are recorded on the income statement below gross profit, which is calculated as revenue minus COGS. This structure allows stakeholders to evaluate how much it costs to run your core business operations before accounting for other items like taxes or financing costs.

Operating expenses are the essential costs that fund your business’s operational activities. They’re ongoing expenses that your business incurs to remain functional and generate revenue.

Operating expenses are an indirect cost, which means they’re not directly tied to the production of goods or services. For that reason, they’re listed separately from the cost of goods sold (COGS) on your income statement.

Common OpEx challenges businesses face

Many businesses struggle with losing track of small recurring expenses that quietly add up over time. At the same time, marketing costs may continue to rise without clear visibility into return on investment, making it difficult to optimize spend.

As headcount grows, personnel costs can increase significantly, further straining budgets.

Additionally, software subscriptions often expand across teams, even when some tools go unused—especially when there’s no clear visibility into tiered pricing structures or renewal terms—leading to ballooning costs without corresponding value.

Types of operating expenses, by function

Operating expenses can be grouped by the function they serve within your business—such as staffing, facilities, marketing, and administration. Breaking them down this way helps you better understand where your money is going and where there may be opportunities to reduce costs without compromising performance.

Below are the major categories, plus examples of operating expenses under each one.

Personnel Expenses

These are costs related to hiring, compensating, and supporting employees. They often make up the largest share of a company’s OpEx.

Examples include:

• Employee salaries and wages (excluding direct labor tied to production)
• Commissions and bonuses
• Employer-paid benefits (health insurance, retirement contributions, etc.)
• Payroll taxes
• Training and development programs
• Travel and relocation costs
• Payroll processing and HR software

Occupancy Expenses

These are costs associated with leasing, maintaining, and operating your physical workspace or facilities. Businesses can reduce occupancy costs by adopting hybrid work models or renegotiating lease terms.

Examples include:

• Office or warehouse rent
• Utilities (electricity, water, internet)
• Property taxes
• Maintenance and janitorial services
• Equipment leases
• Insurance on commercial property

Administrative Expenses

These cover essential support activities that keep your business running but don’t generate direct revenue.

Examples include:

• Office supplies
• Software subscriptions (email, project management, etc.)
• Professional services (accounting, legal, consulting)
• IT support and infrastructure
• Bank fees and credit card processing fees
• Licensing and permits
• Communication expenses (phone, email systems)

Marketing and Advertising Expenses

Costs associated with promoting your business and acquiring customers. Note that these expenses may scale with growth, so it’s important to monitor ROI regularly.

Examples:

• Paid ads (search, social, display)
• Content creation and SEO services
• Sponsorships and influencer marketing
• Marketing software and automation tools
• Event sponsorship and booth costs
• Market research and brand testing

Research and Development (R&D) Expenses

Investments in product innovation, design, or process improvements—especially relevant for tech, biotech, or manufacturing companies. On the bright side, many R&D expenses qualify for tax credits, making them more cost-effective over time.

Examples:

• Product development salaries
• Testing and prototyping
• R&D software and equipment
• Technical consulting or lab services
• Intellectual property development

Depreciation and Amortization

Non-cash expenses that reflect the gradual reduction in value of tangible and intangible assets.

Examples:

• Depreciation of physical assets (equipment, vehicles)
• Amortization of intangible assets (patents, copyrights, trademarks)
• Useful life allocations for long-term business investments

Finance and Interest Expenses

Costs associated with borrowing, financing operations, or managing capital. Caveat: Interest expenses are typically considered non-operating under GAAP but may appear in operating budgets depending on how your business tracks them.

Examples:

• Interest on business loans or lines of credit
• Financing charges from vendors
• Loan origination fees
• Currency conversion or exchange rate losses
• Inventory financing costs

Fixed vs. variable operating expenses

Operating expenses can be divided into two categories: fixed and variable expenses.

• Fixed operating expenses are costs that remain constant regardless of business activity or production. Examples of fixed costs related to business operations include taxes, rent, insurance, most salaries, marketing and advertising costs, and others.
• Variable operating expenses are costs that fluctuate in direct proportion to the level of production or sales activity within your business. Examples of variable costs include utilities, shipping and freight, sales commissions, and credit card processing fees.

Some operating expenses can be either fixed or variable. For example, wages could be fixed or variable depending on whether an employee is paid hourly or receives a full-time salary.

If the employee is salaried, their pay will be considered a fixed operating expense because it’s consistent. Hourly wages, on the other hand, are a variable expense because they fluctuate based on the number of hours worked.

Operating vs. non-operating expenses

Operating expenses are the day-to-day costs a business incurs to keep its core operations running and are directly tied to the company’s primary activities, such as producing goods or providing services.

In contrast, non-operating expenses are costs that arise from activities outside the normal scope of business operations. These are usually irregular or one-time costs not directly related to delivering products or services.

Here’s a closer look at operating versus non-operating expenses.

Both types of expenses appear on your income statement, but separating them provides a clearer picture of your operational efficiency when analyzing financial statements.

CapEx vs. OpEx

Operating expenses (OpEx) differ from capital expenditures (CapEx), which are recorded as assets on your balance sheet rather than immediately deducted on your income statement. CapEx includes long-term investments such as real estate, machinery, and intellectual property, which are gradually depreciated or amortized over time.

Examples of capital expenditures include:

• Real estate
• Equipment
• Furniture
• Intellectual property
• Copyrights, patents, trademarks, etc.

Capital expenses like IP, copyrights, and patents will protect your business in the long term; they don’t immediately impact your day-to-day operations. Conversely, operational expenses like the costs to advertise products or services that result from your capital expenditures do have an impact on your day-to-day operations.

Striking a balance between these two types of expenses is crucial to achieving your long-term growth plans and improving profitability.

How to record operating expenses on your income statement

You record operating expenses on your company’s income statement. Operating expenses are subtracted from your gross profit to calculate your operating profit. Here’s an example income statement we generated using Ramp’s income statement template, with OpEx highlighted in yellow:

Operating expenses are highlighted in yellow on this fictional income statement.

How to calculate operating expenses

There are a couple different formulas you can use to calculate your total operating expenditures. The most straightforward method is to add all your operating expenses to arrive at a total sum:

Operating Expenses = Wages + Rent + Utilities + Insurance + Marketing

Each business operates differently, so your operating expenses could include more items than those listed in this specific formula. It’s essential to first identify all your operating expenses before adding them all together for your final sum.

Another easy way to calculate your operating expenses is to subtract your operating income and COGS from your total revenue. Here’s the formula:

Operating Expenses = Total revenue - Operating income - Cost of goods sold (COGS)

Operating expense ratio (OER) and how to use it

Once you've calculated your operating expenses, you can calculate your operating expense ratio (OER). Your OER is an indicator of your business's efficiency.

A low operating expense ratio is typically indicative of an efficient company. A high operating expense ratio is usually a sign of inefficient business practices. You can use the following formula to calculate your operating expense ratio:

Operating Expense Ratio = Operating expenses / Total revenue

What is a good operating expense ratio?

A good operating expense ratio largely depends on your company’s industry and growth strategy. Generally, a lower OER is ideal because it indicates better operational efficiency, which means your company generates more revenue per dollar of operational expense.

Sometimes, a higher OER might be justified if your company is investing heavily in growth or operational improvements, which could yield higher future revenues and profitability. For example, many growth-stage startups invest heavily in sales and marketing to create awareness and attract new customers, which could lead to a higher operating expense ratio.

That’s why it's important to analyze your OER in the context of industry norms, historical trends, and your company's growth strategy to determine whether it’s at a good level.

» Learn more: How to improve operational efficiency

Best practices for OpEx management

Effectively managing expenses is critical for your company’s financial health. Low operating costs can save your business money and improve your bottom line, but this could also make it harder to operate, which impacts your competitiveness.

High operating costs can improve the quality of your operations, helping you attract more customers and remain competitive in the market. However, your profit margin will shrink if you spend too much on operational expenses.

Here’s how to balance between reducing operating costs and remaining competitive:

1. Track your operating expenses: Gain visibility in real time by tracking your operating expenses as they occur—early insights lead to faster cost optimizations. This will give you a clear picture of your business spending habits, which can help you recognize and eliminate excess spending more quickly.
2. Look for opportunities to renegotiate: In some cases, you may be able to renegotiate the terms of your existing agreements to reduce your operating expenses. If that isn’t possible, explore your options—you may be able to get a similar level of service from a new partner or supplier at a lower cost.
3. Review spend data regularly: Use data to inform your decision-making around operating expenses. Is your advertising spend producing results? Could that money be better spent elsewhere? Reviewing your growth strategies in this context can help you maximize ROI to generate more revenue.

As a business owner, establishing good financial controls and creating an operating budget to account for spending will help keep your business expenses in check.

How Ramp helps you optimize OpEx

Tired of reconciling expenses manually or overspending on hidden costs?

Ramp’s all-in-one expense management software automates expense tracking and reporting, helping you manage and reduce your operating costs in a targeted way.

Ramp Intelligence uses AI to suggest cost-saving opportunities, like whether you’re paying too much for software subscriptions. Our platform also offers integrations with leading accounting solutions like QuickBooks, NetSuite, and Sage Intacct to help you identify unnecessary spending and take control of your business's cash flow.

Ready to learn more? Watch a demo video to see how much you can save.