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What are Operating Expenses (OpEx)?

Operating expenses (OpEx) are the day-to-day costs a business incurs to keep running, such as rent, salaries, utilities, marketing and software subscriptions. They are recorded on the income statement in the period they are incurred and are subtracted from revenue to arrive at operating profit. They are distinct from the one-off cost of buying long-term assets.

The distinction that matters is OpEx versus CapEx. OpEx is the cost of operating today: the rent you pay each month, the payroll you run, the electricity and the software licences. Because these are consumed in the period they are paid, they are expensed immediately and reduce profit for that same period. CapEx, by contrast, is money spent to acquire or upgrade a long-lived asset, which is then depreciated over several years.

Keeping OpEx clearly separated from one-off asset purchases matters for two reasons. First, it makes the income statement a truthful picture of what it costs to run the business at its current size. Second, investors and lenders look at operating expenses relative to revenue as a measure of operating efficiency: a business whose OpEx grows faster than its revenue for a sustained period is spending more to stand still, which is a warning sign even when total profit is positive.

Example

A design studio pays €2,000 a month in rent, €6,000 in salaries, and €400 in software subscriptions. Those €8,400 are operating expenses, expensed in the month they occur. When the same studio buys a €3,000 computer, that is not OpEx; it is a fixed asset, and only a portion of its cost is expensed each year through depreciation.

Questions

What is the difference between operating expenses and capital expenditure?

Operating expenses are the recurring cost of running the business and are expensed immediately. Capital expenditure is money spent to buy or improve a long-lived asset and is spread over the asset's useful life through depreciation. Rent and salaries are OpEx; a new machine or vehicle is CapEx.

Why do operating expenses matter for a small business?

Because they are the clearest measure of what it costs to run the business as it is today. A founder who knows their OpEx can see their break-even point, price work so it covers costs, and spot spending that grew without a matching increase in revenue.

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