What operating expenses actually are

Operating expenses are the everyday costs of running your business, separate from what it takes to actually deliver your product or service. They sit in the background, but they shape how heavy your business becomes to run over time.

They don’t move in a straight line with your sales, but they do determine how heavy your business becomes to run over time.

Why operating expenses matter for your business

Operating expenses matter because they determine how much it actually costs to keep your business running before you generate any real profit. They shape your margins, cash flow, and how sustainable your growth really is.

• Your break-even point comes from here: The higher your operating expenses, the more revenue you need just to get to zero. If this keeps moving up, growth won’t feel as rewarding as it should.
  
• Runway depends on how this is managed: Recurring costs don’t wait. If spending increases without a clear return, you’ll feel it in your cash position sooner than expected.
  
• Pricing only works if this is under control: It’s not just about covering delivery costs. Your pricing has to support everything behind the scenes too. If margins feel tight, this is usually where the pressure is coming from.
  
• This is where inefficiencies start showing up: When expenses grow faster than revenue, something needs a closer look. It could be tools doing the same job, processes getting heavier, or costs that haven’t been revisited in a while.
  

Main Types and examples of operating expenses

Operating expenses rarely show up as neat categories when you’re running a business. They build through everyday decisions over time, which is why recognizing where most spending happens makes it easier to manage costs before they grow too quickly.

People and payroll costs

This is where most of your spend goes as you start building a team. Salaries, benefits, contractor payouts, and hiring costs, add up quickly when decisions happen close together.

A few roles that felt necessary at the time can quietly turn into a cost base that needs a lot more revenue to support.

Sales and marketing spend

This is where it’s easiest to keep increasing spend because it feels tied to growth. Think paid ads, agencies, content, tools, and campaigns.

The issue shows up when spend keeps rising, but results don’t. At that point, you need to double down on what’s working instead of increasing the budget across the board.

Software and tools

This is where costs usually creep in without much attention. You add a CRM, then something for analytics, then a tool for accounting, then another for collaboration. Each one solves something in the moment. Later, you realize you’re paying for tools that overlap or aren’t really getting utilized well.

Rent, utilities, and infrastructure

Office rent, internet, electricity, cloud costs, these feel like standard setup. So they rarely get questioned. But they lock you into a certain level of spend. It’s common to take on infrastructure that fits where you want to be, not where you are right now.

Professional services and admin costs

Legal, accounting, compliance, outside support, you don’t really skip these. The issue is how quickly they expand. Sometimes the business has actually become more complex. Other times, you’re just continuing with setups that haven’t been simplified.

Maintenance and general overhead

These are the smaller things. Repairs, subscriptions, travel, and everyday operational spend. None of them stand out on their own. But when this bucket keeps getting bigger, it means something in your setup isn’t running as efficiently as it could.

Operating expenses vs COGS, CapEx, and non-operating expenses

Operating expenses are the costs of running your business day to day, while COGS covers the cost of delivering your product or service, CapEx refers to long-term investments, and non-operating expenses are unrelated to core operations.

Understanding this difference helps you know whether your costs are affecting margins, growth, or one-time profitability.

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If your costs are rising, here’s where to look

• If money is going into COGS (delivery costs): Your product or service is getting expensive to deliver. Look at pricing, supplier costs, or how efficiently you’re delivering.
  

• If money is going into operating expenses (OpEx): Your business is getting heavier to run. Look at team size, tools, processes, and whether everything still needs to be there.
  

• If money is going into CapEx (investments): You’re building ahead of growth. That’s fine if it’s intentional, but it will put short-term pressure on cash flow.
  

• If money is going into non-operating costs: This is not your core business performance. Look at whether it’s a one-time hit or something that could repeat.
  

How to calculate operating expenses

There isn’t just one way to get to your operating expenses. You can either build the number by adding up what you’re spending across the business, or work backwards using your finances.

Which one you use really depends on what you’re trying to figure out. If you want a clear picture of where money is going, you’ll build it from the ground up. If you just need a quick read from your income statement, you can derive it using revenue, operating income, and COGS.

1. Direct method: add up your operating costs

If you’re building this from your own tracking or trying to understand where money is going across teams, the easiest way is to sum up all your operating costs.

Formula: Operating expenses = Payroll + Rent + Software + Marketing + Insurance + Other operating costs

This formula gives you full visibility into where your money is going. If pulling these numbers together feels difficult, it usually means your expenses are scattered or not categorized properly, which is where most cost leaks start.

2. Derived method: calculate from your financials

If you’re reviewing your income statement or trying to quickly check performance, you can calculate operating expenses using existing financial data.

Formula: Operating expenses = Total revenue − Operating income − COGS

This is useful when you want a quick answer, but it won’t tell you what’s actually driving the number. If operating expenses seem high here, you’ll still need to go deeper and break them down to fix anything.

3. Operating expense ratio (OER)

Once you know your operating expenses, the next step is to understand how heavy they are compared to your revenue.

Formula: Operating expense ratio = Operating expenses ÷ Total revenue

Example: If your revenue is $100,000 and operating expenses are $65,000, your OER is 65%.

This is where things get real. A high ratio means a large part of your revenue is going into running the business, not building profit. That can be fine if you’re intentionally investing in growth, but if not, it’s a sign your cost structure needs attention.

How to use this without overcomplicating it

• If you want control, start with the direct method
  
• If you want a quick snapshot, use the derived method
  
• If you want to track efficiency over time, focus on the ratio
  

At the end of the day, what matters is whether your operating expenses are growing for the right reasons or just becoming harder to manage.

Where operating expenses appear on the income statement

On your income statement, operating expenses sit between gross profit and operating income. That’s the part where you start to see what it actually takes to run the business once the cost of delivering your product is already covered.

It’s also where things usually become clearer. You can have solid revenue and decent gross margins, but if this section keeps getting heavier, it starts to explain why profit doesn’t feel as strong as it should.

Example: where operating expenses sit

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They sit right after gross profit

Once you subtract COGS from revenue, operating expenses come next. If your gross profit looks solid but profits feel tight, this is usually where things are getting expensive.

They lead directly into operating income

Operating expenses are deducted from gross profit to arrive at operating income, which reflects your core business performance.

They’re often grouped together

Most statements combine them under SG&A or similar categories. If you don’t break this down internally, it’s hard to spot where costs are actually increasing.

They appear before non-operating costs

Expenses like interest, one-time legal costs, or unusual items sit below this section. Keeping this separation helps isolate core operations from everything else.

Ways to manage or reduce operating expenses

Most cost issues build gradually as the business grows and decisions stack over time. What felt reasonable at each step can eventually turn into a cost base that’s harder to support.

The goal here is to understand which costs are actually helping the business move forward and which ones are just staying because no one questioned them.

Know which costs are earning their place

Some expenses clearly help you grow, improve execution, or save time. Others are still there because they once solved a problem. If a cost is no longer helping your team move faster, bring in revenue, or operate better, it’s worth reviewing.

Look at the total picture, not one line item

A single hire might feel manageable. One more software subscription might not seem like much. But when you add those decisions across functions, your operating cost base changes quickly. What matters is the combined effect on the business.

Be careful with costs that are hard to unwind

Some expenses are easier to change than others. Once you take on salaries, leases, or long-term contracts, they usually stay for a while. Before committing, ask yourself if your current revenue can support this even if things slow down for a bit.

Notice when spending starts adding friction

More spending should make your team move faster. If a new tool or process is adding approvals, extra coordination, or slowing decisions, it’s not really helping. At that point, it’s worth looking at how it’s being used, not just how much it costs.

Match your cost base to where you are today

It’s easy to hire early or invest in better tools, thinking ahead. But if revenue hasn’t caught up yet, those costs start showing up quickly. Your cost base should match the business you’re running right now, not just where you expect it to be.

Match your cost base to your current stage

It’s easy to hire, buy, or build for the company you want to become. But if your revenue is still catching up, those decisions can create pressure faster than expected. Your cost structure has to make sense for the business you’re running now, not just the one you’re planning for.

Track changes while they’re still small

High-cost jumps get attention. Smaller increases usually don’t. That’s why they’re easy to miss. If you stay close to your numbers during the month, you can catch rising spend early and adjust before it becomes part of your normal operating base..

Conclusion

Operating expenses shape how your business actually runs and how far your revenue goes. The real decision is whether your current cost structure supports the way you want to grow.

If you stay close to your operating expenses, you start seeing patterns early. You’ll know when costs are increasing for the right reasons, when they’re getting ahead of revenue, and where small decisions are adding up. That’s what helps you adjust before margins or cash flow start feeling tight.

Operating expenses also affect how your business is taxed. Most of these costs are deductible, which reduces your taxable income. But that only works if your expenses are tracked and categorized properly. If they’re not, you either miss deductions or create issues during reporting.

This is also where having the right systems in place makes a difference. Aspire¹ gives you a way to manage your business account, payments, corporate cards², and expense tracking in one place, so you’re not piecing together your financial picture across tools. With built-in visibility, automation, and real-time tracking, you get a clearer view of your operating expenses as they happen, which makes it easier to stay in control as your business scales.

FAQs

What is excluded from operating expenses?

Operating expenses do not include costs directly tied to producing your product or service, like raw materials or production labor (COGS), and they also exclude long-term investments like equipment purchases (CapEx). One-time or financing-related costs like interest payments are also not part of operating expenses.

How do you calculate operating expenses?

You can calculate operating expenses by adding all your day-to-day business costs like payroll, rent, software, and marketing. Alternatively, you can use your financials:

Operating expenses = Revenue − Operating income − COGS.

What are the two main types of operating expenses?

The two main types are fixed expenses, which stay consistent like rent and salaries, and variable expenses, which change with business activity like marketing spend or commissions.

What counts under operating expenses?

Operating expenses include costs required to run your business, such as employee salaries, rent, utilities, software subscriptions, marketing spend, insurance, and professional services.

What’s not included in operating expenses?

Costs like cost of goods sold (COGS), capital expenditures like equipment purchases, and non-operating expenses such as interest or legal settlements are not included in operating expenses.

What are 5 examples of operating expenses?

Five common examples are employee salaries, office rent, marketing and advertising costs, software subscriptions, and insurance expenses.