What are Operating Expenses?

Operating expenses are the day-to-day costs of running a business. They include everything a company must spend money on to keep its operations moving, such as salaries, rent, utilities, marketing, and office supplies. In short, operating expenses are what it takes to keep the lights on and the doors open.

Understanding operating expenses is critical because they directly impact profitability. The more efficiently a business manages these costs, the more money it has left over to invest in growth or return to shareholders.

Types of Operating Expenses

Operating expenses generally fall into a few major categories:

• Selling, general, and administrative expenses (SG&A): This includes salaries for office staff, rent, insurance, utilities, and office supplies.
• Marketing and advertising: Campaigns, digital ads, and promotional activities that help generate sales.
• Research and development: Costs related to creating new products or improving existing ones.
• Depreciation: The gradual reduction in value of equipment, buildings, or vehicles used in the business.

While these are the most common, every business has its own mix of operating expenses depending on its industry.

---

---

Operating Expenses vs Cost of Goods Sold

A common point of confusion is the difference between operating expenses and the cost of goods sold (COGS). COGS refers to the direct costs of producing a product or service, such as raw materials and factory labor. Operating expenses, on the other hand, are the indirect costs of running the business, like paying for office space or hiring an accountant.

Both matter, but they serve different purposes. COGS is subtracted from revenue to calculate gross profit. Then, operating expenses are deducted to calculate operating income.

Why Operating Expenses Matter

Operating expenses give investors and financial advisors insight into how efficiently a business is being managed. High operating expenses can drag down profits even if revenue is strong. On the other hand, cutting expenses too aggressively can hurt growth if it means reducing marketing or talent.

For entrepreneurs and small business owners, keeping track of operating expenses is just as important as it is for large corporations. Using budgeting apps or accounting software can help identify areas where costs can be reduced without hurting the overall health of the business.

Learning from Operating Expenses

Studying how businesses manage operating expenses can also help individuals learn more about money in their personal lives. Just as companies need to budget for salaries, rent, and utilities, households must budget for groceries, housing, and transportation.

Many popular books on money, like Your Money or Your Life by Vicki Robin, highlight the importance of identifying where your money goes and aligning expenses with your values. The same principle applies to businesses: money spent should support the long-term goals of the organization.

Final Thoughts

Operating expenses are more than just numbers on a financial statement. They represent the choices a business makes every day about how to allocate resources. For investors, entrepreneurs, and anyone trying to strengthen their financial knowledge, understanding operating expenses provides valuable lessons about efficiency, decision-making, and long-term success.