What are operating expenses (OpEx)? Definition and example

Operating expenses, sometimes known as OpEx, cover the everyday costs that keep a business running. They sit at the heart of every company’s budget, influencing spending decisions and performance benchmarks. The better you understand where your money goes each month, the better you become at budgeting and setting effective business strategies.

Read on to learn more about what operating expenses are and how these costs impact your organization. 

Understanding operating expenses

The meaning of OpEx is the recurring costs required to keep operations running from day to day. These appear on the income statement and typically include items like rent, payroll, and marketing—all essential for daily business operations. 

The list of specific items that count as OpEx depends on the type of business and industry. An example for a retail chain might be store leases, staff wages, and local ads. A tech company may list cloud hosting and developer salaries. No matter the industry, OpEx captures the costs that keep the business moving from one month to the next. 

Regardless of the sector, OpEx reflects the monthly costs that sustain core operations. It excludes one-time investments such as property purchases and equipment upgrades, which are classified as capital expenditures (CapEx). To understand OpEx, it helps to look at it through three lenses: how they show up across different industries, how they behave over time, and how they inform financial decisions.

Operational activities

Operating expenses vary by industry. For example, retail has store leases and staff wages, while healthcare providers face costs for medical supplies and compliance requirements. But the idea doesn’t change: OpEx represents the costs that keep the core operations moving, from paying employees to keeping the lights on.

Fixed and variable costs

Most operating expenses fall into two categories. Fixed costs remain steady no matter what, like annual insurance premiums. Variable costs fluctuate with business volume—like travel expenses, sales commissions, or hourly wages. 

Not all expenses fall neatly into one category. For example, within labor, a salaried employee is a fixed cost, but hourly workers are a variable cost. To better understand labor expenses, you can use an employee cost calculator to estimate the full cost of employment—including salary and taxes—across different locations.

Financial insight

Understanding what OpEx in finance means goes beyond listing costs. It’s about recognizing how they reflect business activity. Finance teams often review OpEx to identify which costs are fixed or variable and how they shift with operational demands. This analysis helps clarify spending patterns and supports more accurate budgeting and forecasting.

Typical examples of operating expenses

Before you run the numbers, it’s important to understand what’s included in operating expenses:

• Employee salaries and benefits: Payroll is usually the largest line item. It covers salaries and wages, health insurance, and retirement contributions. In many cases, this includes direct labor costs for production staff and broader expenses tied to how much an employee costs your business. 
• Rent and utilities: Whether it’s office space or storefronts, rent is a monthly operating expense. Add in utilities like power, water, and internet, and these costs can take up a large portion of your OpEx.
• Marketing and advertising costs: From social media campaigns to print ads and sponsorships, these are the dollars spent to get your products and services in front of customers. 
• Office supplies and maintenance: Think of everyday purchases—paper, ink, software subscriptions—plus the cost of fixing or maintaining equipment and facilities. 
• Insurance and professional services: These costs include premiums for property or liability coverage, along with fees for accountants or payroll services who keep operations compliant and running smoothly.

Operating vs. non-operating expenses

Operating expenses—like salaries, rent, and utilities—form the core costs of running a business. Non-operating expenses are unrelated to daily operations. Examples include interest expense on loans, charges from selling off assets, and one-off items like asset impairments and restructuring costs. 

It’s best to consider these costs separately to accurately measure performance. When you calculate operating income, you subtract the cost of goods sold and operating expenses from revenue. By keeping non-operating expenses separate, you get a more precise view of how efficiently the company runs its core operations.

Here’s how that distinction looks on a company income statement:

OpEx vs. CapEx: What’s the difference?

As we’ve learned, OpEx reflects day-to-day costs, which show up in full on the income statement during the period they occur. They also flow through the cash flow statement under operating activities. 

CapEx covers big-ticket investments that a company expects to use for years. This includes building and equipment purchases and major technology upgrades. These purchases don’t appear on the income statement all at once. Instead, they’re listed on the balance sheet as assets, and they then gradually lose value through depreciation or amortization. CapEx also appears on the cash flow statement under investing activities.

In short: 

• OpEx: Recurring, short-term costs, fully expensed right away
• CapEx: Long-term investments, capitalized and written off gradually

Why do operating expenses matter?

Tracking OpEx gives managers and decision makers a clear view of how their business runs. The main benefits include: 

• Profitability: OpEx directly affects the bottom line. By keeping a close eye on it, companies can spot unnecessary costs early and make corrections to protect profits. 
• Budget planning: Accurate budgets depend on knowing where the money goes. Reviewing OpEx helps business leaders forecast future spending, set realistic goals, and make informed trade-offs when resources are tight. 
• Operational efficiency: Comparing OpEx over time and against competitors reveals how efficiently a business uses its resources. If OpEx as a percentage of revenue is higher than peers, it can signal inefficiencies.

How to calculate operating expenses

To find out how much you spend on OpEx, add up the costs that keep your business running from one month to the next. 

Formula: 

OpEx = Rent + utilities + salaries and benefits + insurance + office supplies + professional services + other operating costs

How to manage and reduce operating expenses

Every business has operating expenses, but you don't want them cutting into your profits more than necessary. Here are a few strategies companies often use to manage OpEx effectively: 

• Outsource non-core activities: Moving work like IT support, payroll processing, and customer service to outside providers who can complete the work for less money. This also helps businesses focus internal resources on strategic priorities.
• Leverage automation tools: Automating routine processes, like invoice approvals and employee onboarding, reduces the costs of manual labor and speeds up workflows. 
• Negotiate better vendor terms: Building long-term relationships with suppliers can open the door to discounts, flexible payment schedules, and bundled services that reduce recurring costs without sacrificing quality. 
• Shift to flexible work models: Remote or hybrid setups can lower office expenses and utility bills. Learn how to manage OpEx for remote workers, so these savings add up as you expand globally. 
• Conduct regular expense audits: Reviewing expenses line by line can reveal wasteful spending—like unused software subscriptions, duplicate services, and inflated contracts—so you can use those funds to fuel growth. 

Optimize hiring costs and tap global talent with Oyster

People-related expenses often make up the largest share of OpEx, and managing them across borders can get complicated fast. Oyster gives HR teams the tools to hire, pay, and support global workforces while maintaining full visibility into compensation and compliance costs. This makes it easier to reduce your hiring costs. 

With Oyster’s strategic partnership solution, you can align global hiring plans with financial goals, making it easier to manage payroll and attract top talent anywhere in the world. 

FAQ

What expenses count as operating expenses?

OpEx covers the ongoing costs of running a business. Common expenses include rent, utilities, and insurance. They appear on the income statement, separate from costs of goods sold. 

Are operating expenses tax-deductible?

Yes. In the U.S., the IRS allows businesses to deduct OpEx, but they must meet specific criteria: The costs have to be ordinary in your industry, necessary for running the business, incurred in the same tax year, and reasonable in amount. Some costs like salaries and rent usually qualify, while capital expenses are treated differently. 

Are salaries considered an operating expense?

Yes. Salaries and benefits for most staff members, such as administrators and sales teams, are classified as OpEx. But direct labor—the wages paid to employees or contractors directly involved in producing goods or delivering services—is counted as costs of goods sold instead of OpEx. 

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.