What are operating expenses: Types, calculation, and cost-saving strategies

Ever wonder how a company can look successful but still struggle to stay afloat? Often, it boils down to operating expenses.

Operating expenses, or OpEx for short, are the ongoing expenses a business incurs from its day-to-day operations. They’re the costs of keeping the lights on and the business running, such as rent, salaries, utilities, and marketing.

Whether you’re a tech giant or a local bakery, operating expenses can impact your company’s profitability and long-term viability. In this guide, we’ll clarify the meaning of OpEx and answer the important question of how to keep these costs in check.

What are operating expenses?

Operating expenses for a business are regular, recurring expenses that help it maintain its core functions. If they’re not managed correctly, they may cause financial instability and hinder growth — that’s why it’s so important to track expenses diligently and understand where your money is going.

So, what are considered operating expenses? They typically encompass a wide range of day-to-day costs, but often differ between industries. For example, a software company might have higher technology expenses, while a retailer might spend more on inventory storage.

Notably, operating expenses exclude costs directly associated with producing goods or services (cost of goods sold) and long-term investments or physical assets (capital expenditures).

What is included in operating expenses?

Here are some common examples of business operating costs:

• Salaries and wages: Compensation paid to employees, including regular salaries, wages, and benefits like healthcare, retirement contributions, and paid time off.
• Rent and utilities:  Fixed costs associated with leasing or owning office, retail, or manufacturing spaces, as well as expenses for utilities like electricity, water, heating, and internet.
• Office supplies: Materials and supplies needed for daily operations, like paper, pens, and coffee.
• Software and technology: Business expenses for software licenses, IT services, and technology upgrades.
• Insurance: Premiums paid for various types of insurance coverage, such as liability insurance, property insurance, and business interruption insurance.
• Marketing and advertising: Business expenses related to promoting the company, including advertising campaigns, marketing materials, public relations, and digital marketing.
• Maintenance and repairs: Costs associated with maintaining and repairing equipment, machinery, vehicles, and facilities.
• Professional services: Payments to external consultants, legal advisors, and accountants for specialized services and expertise.
• Taxes and licenses: Payments for business licenses, permits, and various taxes.
• Depreciation: The decrease in value or wear and tear that an asset experiences as it’s used in business operations.
• Travel: Expenses incurred for business-related travel, accommodations, and client meetings.

What are non-operating expenses?

Non-operating expenses fall outside of core operations. In other words, they’re not directly related to generating revenue or producing goods and services.

But just because non-operating expenses don’t tie directly to making money doesn’t mean they don’t matter — far from it. These expenses can eat into profits, affect cash flow, and even impact how attractive a business looks to investors or lenders.

Some common non-operating expenses include:

• Interest payments on debt: Interest incurred on loans.

• Restructuring costs: Expenses associated with reorganizing or restructuring a business, such as severance pay or asset write-downs.

• Legal settlements: Payments made to settle lawsuits or legal disputes.

• Losses from asset sales: Financial losses when selling assets below their book value.

• Currency exchange losses: Costs resulting from unfavorable fluctuations in currency exchange rates.

How to calculate operating expenses

When it comes to understanding how to calculate operating expenses, it’s important to note that there isn’t a strict mathematical formula. Instead, the process involves identifying and categorizing all relevant costs that contribute to the daily operations of a business, then adding them up.

To calculate operating expenses, follow these steps:

1. Identify and categorize expenses: Break down your expenses into expense categories, such as administrative costs (e.g., office supplies, HR salaries), selling costs (e.g., advertising, sales team salaries), utilities, and other general expenses (e.g., electricity, insurance).
2. Exclude non-operating costs: Filter out costs like taxes, interest, cost of goods sold, and capital expenditures.
3. Add them up: Once you’ve categorized all relevant costs, add them up to find your total operating expenses.

Pro tip: While these calculations can be done manually, many businesses use accounting software to streamline the process. Most budget software for businesses also integrates with banking systems to automate transaction tracking, which reduces errors and saves time.

Operating expense budgets and forecasting

Crunching the numbers is only the first step — creating a solid operating expense budget ensures those numbers work in your favor. A well-planned budget helps businesses track expenses, avoid overspending, and make smart financial decisions.

Beyond just tracking expenses, budgeting helps align spending with strategic goals. It ensures funds are directed toward essential activities while identifying areas where costs can be trimmed. Forecasting takes this a step further, helping businesses anticipate future expenses and adjust as needed.

And if budgeting feels overwhelming? A financial professional, like an accountant or strategic planner, can help refine your approach, set realistic expense targets, and build a budget that keeps your business financially strong for the long haul.

Importance of managing operating expenses

Managing operating expenses effectively is essential for long-term profitability and sustainability. This is especially important in the early stages of launching a business — startup costs can often pile up quickly, and revenue can be slow and unpredictable.

Here are some top benefits businesses enjoy when managing operating expenses effectively:

• Profitability: While increasing revenue is one way to boost profit, cutting unnecessary costs is often the quickest way to achieve a profit boost and strengthen the bottom line.
• Cash flow management: When expenses are controlled, a business can ensure that its cash inflows (revenue) are sufficient to cover its cash outflows (expenses). This is essential for meeting immediate financial obligations, such as paying employees, suppliers, and creditors.
• Resource allocation: By analyzing and managing expenses, a company can allocate its resources more efficiently, such as reallocating funds from less productive areas to those that drive growth.
• Growth opportunities: A company that can successfully reduce operating expenses frees up funds to reinvest in the business, whether through hiring, product development, or expanding into new markets.
• Resilience: Businesses with well-managed operating expenses can better navigate challenging times like economic downturns, natural disasters, or supply chain disruptions.
• Debt management: By keeping operating expenses in check, a company is more likely to avoid debt and the associated interest payments from loans or credit.
• Long-term viability: Effective revenue management helps prevent excessive spending that could otherwise erode profitability and hinder growth.

Strategies for reducing operating expenses

Looking to cut costs? Once you’ve listed and analyzed your spending, you can better understand where your money is going and identify opportunities for reducing operating expenses.

Here are some quick strategies to help get you started:

• Renegotiate contracts: You don’t have to accept the first offer. Review contracts for services like rent, utilities, and insurance regularly. You might be able to secure better rates by negotiating with your current providers or exploring alternatives.

• Embrace digital marketing: Traditional advertising can be expensive, but digital marketing for small businesses offers budget-friendly ways to connect with your audience. Social media marketing, content marketing, and search engine optimization (SEO) all help boost visibility without breaking the bank.

• Outsource strategically: Consider outsourcing non-core functions, like IT support, payroll processing, and customer service to specialized vendors. They can often handle these tasks more efficiently and cost-effectively than in-house teams.

• Minimize waste: Implement waste reduction strategies to minimize material and resource use, such as recycling, reusing materials, and optimizing production processes.

• Automate with technology: Invest in automation software that can improve efficiency and reduce labor costs. This can include tools for inventory management, customer relationship management (CRM), and accounting.

• Embrace flexibility: Explore remote work and flexible scheduling options, which can reduce office space costs and improve employee satisfaction.

• Negotiate with suppliers: Build strong relationships with your suppliers and don’t be afraid to negotiate better deals. Bulk purchasing or long-term contracts may lead to cost savings.

• Optimize inventory: Holding onto too much stock can tie up your cash and even lead to losses if items become outdated or spoil. "Just-in-time" inventory methods can help you avoid these pitfalls by ensuring you only receive inventory when you need it.

• Control travel costs: If your team travels for work, put savvy policies in place. Can you swap some trips for video calls? Can you negotiate discounts with airlines and hotels? Make sure to set clear travel expense guidelines as well.

• Promote employee engagement: When your team feels valued and engaged, they're more likely to stick around and do their best work. Investing in employee morale can actually save you money in the long run by reducing costly turnovers and the need to constantly hire new people.

How can small businesses avoid common operating expense mistakes?

Money management for small business owners isn’t always straightforward, especially when you’re already juggling day-to-day operations, unexpected costs, and the challenge of staying profitable.

Beware of these common pitfalls:

• Mixing personal and business finances: Maintain clear separation between personal and small business expenses by using dedicated accounts and payment methods. Keep detailed records to stay organized and avoid tax-time headaches.
• Neglecting expense tracking: Use expense tracking software to record and categorize all expenses accurately. Regular reconciliation can help identify discrepancies.
• Ignoring small expenses: A few dollars here and there might not seem like much, but over time, they can eat into your budget. Keep an eye on recurring charges, subscriptions, and low-value expenses.
• Underestimating hidden costs: Surprise expenses — like maintenance, upgrades, or taxes — can throw off even the best-planned budget. Always build in a buffer for the unexpected.
• Impulse spending: A flashy new tool or office upgrade might feel like a must-have in the moment, but does it truly add value? Consult your budget and evaluate the necessity and long-term value of purchases before making them.
• Not seeking professional advice: Insights from financial professionals around how to budget for small businesses can improve your expense management and decision-making.