Business operating expenses are the recurring costs a company pays to keep its doors open and deliver its products or services. They include rent, payroll, utilities, software, insurance, and many other day-to-day costs. Understanding them is a core part of budgeting, pricing, and tax planning, whether you run a small shop, a consulting practice, or a growing company.
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What Are Business Operating Expenses?
Operating expenses, often shortened to OpEx, are the costs a business incurs through its normal day-to-day activities. They are generally not tied to producing one specific unit of a product, and they appear on the income statement between revenue and operating profit. Because they recur, they shape how much a business needs to earn to remain financially stable.
Cost of goods sold (COGS) is usually tracked separately from operating expenses. Service businesses, however, may classify direct costs differently, so the boundary between the two can vary depending on the company and its accounting method. The SBA break-even point guidance explains how these costs are commonly grouped when planning a business.
Main Types of Operating Expenses
Most operating expenses fall into a handful of broad categories. The table below summarizes the most common ones, what each covers, a typical example, and how each category usually behaves as activity levels change.
Fixed Operating Expenses
Fixed operating expenses are costs that generally stay the same from one period to the next, regardless of how much a business sells. The SBA’s break-even guidance describes fixed costs as costs that do not change with production or sales volume over a specific period. In practice, fixed expenses often include:
- Rent or lease payments for office, retail, or warehouse space
- Salaries for administrative or management staff
- Insurance premiums
- Software subscriptions and web hosting fees
- Depreciation on equipment and other long-lived assets
- Bank fees and loan interest payments
Some fixed costs are paid on a schedule other than monthly. Property taxes, for example, are often billed annually, while the business may set aside a monthly amount to cover them. Fixed does not necessarily mean the cash outflow is identical every month, only that the underlying obligation does not change with sales volume in the short run.
Variable Operating Expenses
Variable operating expenses rise or fall with business activity. A company with more customers, orders, or projects usually spends more on variable items, and spending typically drops when activity slows. Common examples include:
- Utilities that increase with equipment use or occupancy
- Shipping and packaging costs tied to order volume
- Sales commissions and performance-based bonuses
- Supplies consumed in daily operations
- Maintenance and repair costs that depend on how heavily equipment is used
- Outside professional fees billed by the hour or by the project
Many businesses find it useful to separate fixed and variable costs when forecasting. A rough split helps show how much revenue is needed to cover the fixed base, and how sensitive profits are to changes in sales.
Operating Expense Examples Across Industries
The mix of operating expenses differs by industry. A few illustrative examples:
- Retail store: rent, store staff wages, point-of-sale software, utilities, and packaging supplies.
- Consulting firm: office lease, staff salaries, accounting software, professional liability insurance, and travel for client work.
- Restaurant: rent, kitchen utilities, cleaning services, and repairs to kitchen equipment, along with food purchases that many accounting setups track as cost of goods sold.
- Online business: web hosting, digital advertising, email marketing tools, and shipping costs.
Service-based organizations, including law firms, show how these categories apply in practice. A breakdown of business expenditure in legal practice may include office rent, research databases, staff salaries, insurance, and technology subscriptions. Each item fits into the same categories described above, which makes it easier to compare costs across different types of organizations.
How Operating Expenses Are Treated for Taxes
In the United States, the IRS generally describes a deductible business expense as one that is both ordinary and necessary. An ordinary expense is common and accepted in the taxpayer’s industry, and a necessary expense is helpful and appropriate for the trade or business. The IRS guide for small businesses, IRS Publication 334, Tax Guide for Small Business, covers how these rules apply to common costs.
Whether a particular expense qualifies depends on the facts and circumstances, and the timing of deductions can depend on the accounting method a business uses, such as cash or accrual. Costs that create long-term value, such as major equipment purchases, are often treated differently from routine operating costs. Businesses in other countries should review the rules in their own jurisdiction.
Tracking and Budgeting Operating Expenses
Operating expenses also feed directly into break-even analysis. Dividing fixed costs by the contribution each sale makes toward covering them gives a rough estimate of the sales volume needed to cover the fixed base. The SBA provides a break-even calculator that can help with this kind of planning.
To keep operating expenses organized, many businesses follow a few practical steps:
- Record each expense in a consistent category as it occurs.
- Review recurring fixed costs, such as subscriptions, at least once a year.
- Compare actual variable costs against the budget each month.
- Keep receipts and invoices in an organized system for tax records.
- Look for cost changes that could affect pricing decisions.
Frequently Asked Questions
What is the difference between operating expenses and cost of goods sold?
Cost of goods sold covers the direct costs of producing or purchasing the items a business sells. Operating expenses cover the broader costs of running the business. Classification can vary by industry and accounting method.
Is depreciation an operating expense?
Depreciation is often reported within operating expenses on the income statement. It spreads the cost of a long-lived asset over its useful life rather than recording the full purchase price at once.
How often should operating expenses be reviewed?
Many businesses review operating expenses monthly to catch variances early, and review larger fixed contracts at least annually. The right schedule depends on the size and complexity of the business.
Final Thoughts
Operating expenses are the ongoing costs that keep a business running, and they are easiest to manage when they are clearly categorized. Separating fixed costs from variable costs supports better forecasting, pricing, and tax records. Reviewing these expenses on a regular schedule gives business owners a clearer picture of how much revenue they need to stay on track.
