Operating expenses are recurring costs necessary to sustain daily business activities and generate revenue. They are essential for the continued operation of a business and are typically incurred within a short time period.
Operating Expenses Definition
Operating expenses, also known as OPEX, refer to the ongoing costs incurred by a business to maintain its day-to-day operations. They are a fundamental component of a company’s income statement, also known as the statement of operations or profit and loss statement. They are subtracted from the company’s total revenue to calculate its operating income or profit. As a result, higher operating expenses can lead to lower profits, which may impact critical financial ratios and the business’s overall financial health.
- Rent: The cost of leasing or renting office space, retail space, or manufacturing facilities.
- Salaries and wages: The compensation paid to employees for their work, including regular wages, overtime, and bonuses.
- Utilities: The expenses associated with essential services such as electricity, water, gas, and internet connectivity.
- Advertising and marketing: The costs incurred to promote products or services, including advertising campaigns, online marketing, print materials, and media placements.
- Office supplies: The expenditures for essential office materials, stationery, printer supplies, and other consumables.
- Insurance premiums: The payments made to insurance providers to cover business liabilities, property, or general liability insurance.
- Maintenance and repairs: The expenses incurred to maintain and repair equipment, machinery, vehicles, or facilities.
- Travel and entertainment: The costs associated with business-related travel, including airfare, accommodation, meals, and client entertainment expenses.
- Professional services: The fees paid to external consultants, lawyers, accountants, or other professionals who provide specialized services to the business.
- Licensing and permits: The expenses for obtaining licenses, access, or certifications required to operate legally in a particular industry or jurisdiction.
This list provides a glimpse of the diverse operating expenses that businesses may encounter. But it’s important to note that the specific operating costs can vary depending on the company’s nature and industry.
Showcase new skills
Build the confidence and practical skills that employers are looking for with Forage’s free job simulations.
Who Needs to Understand Operating Expenses?
Since operating expenses immediately impact profitability, they require ongoing monitoring and control. Companies strive to optimize operating expenses without compromising the quality of their products or services. By understanding and analyzing operating expenses, accountants and finance professionals can evaluate a company’s operational efficiency, profitability, and overall financial health.
Types of Operating Expenses
OPEX can be categorized into two main types: fixed and variable.
- Fixed Expenses: These costs remain relatively constant regardless of production or sales volume changes. Examples include rent, insurance premiums, annual salaries, and depreciation expenses. Fixed expenses are more predictable and stable, providing consistency in financial planning and budgeting.
- Variable Expenses: These costs fluctuate directly with production or sales volume changes. Examples of variable expenses include raw materials, direct labor costs, commissions, and shipping expenses. Variable expenses can significantly impact a company’s profitability as they directly affect the cost of producing goods or delivering services.
Operating Expenses vs. Capital Expenditures
While operating expenses are ongoing costs incurred to maintain day-to-day operations, capital expenditures are investments made in long-term assets that provide benefits beyond the current accounting period. These expenses, or capital expenditures or CAPEX, are typically incurred to acquire or upgrade assets such as buildings, machinery, vehicles, and computer systems.
Accountants record each type of expense differently. Capital expenditures are not fully expensed in the period they are incurred. Instead, they are recorded as assets on the balance sheet and gradually expensed over time through depreciation (for tangible assets) or amortization (for intangible assets). By spreading the asset’s cost this way, the impact on the income statement is distributed over multiple accounting periods.
Operating expenses, conversely, are fully expensed in the period they are incurred. They are deducted from revenue on the income statement to calculate the operating income or operating profit.
Understanding the distinction between operating expenses and capital expenditures is essential for students pursuing accounting or corporate finance careers. It enables them to accurately analyze financial statements, evaluate profitability, make informed investment decisions, and effectively manage the financial health of organizations. Learn more about expenses.
Showcasing You Understand Operating Expenses on Your Resume
Operating expenses are an essential component of financial statements. You can convey that you have a firm understanding of them by incorporating any of the following items on your resume:
- Emphasize internships or work experience: If you have prior experience in accounting or finance roles where you dealt with operating expenses, highlight it in the “Experience” section of your resume.
- Sample line: Analyzed monthly operating expenses, identified cost-saving opportunities, and prepared financial reports as an intern at ABC Company.
- Mention financial analysis skills: Under your resume’s “Skills” section, highlight skills related to financial analysis that are relevant to understanding operating expenses.
- Sample line: Financial Analysis: Proficient in analyzing operating expenses, conducting variance analysis, and identifying trends to support decision-making and cost-control efforts.
- Provide examples of cost management: Showcase your ability to identify cost-saving opportunities or implement strategies for efficient expense management.
- Sample line: Implemented cost-saving measures resulting in a 15% reduction in operating expenses within the marketing department.
Related Accounting and Finance Skills
Anyone interested in corporate finance and accounting must know what operating expenses are and why they matter. Some other skills and concepts finance professionals should master include:
- Financial statement analysis
- How to calculate EBITDA
- How to calculate contribution margin
- Understanding the accounting equation formula
Start learning these and other in-demand skills today with Forage’s free job simulations.