What are Operating Expenses?

Operating expenses is a term used frequently in the corporate world. It refers to ongoing costs necessary to run a business. In other words, operating expenses are the cost of what occurs behind the scenes. This includes any costs related to the actual operation of the company.

Sometimes the term operating expenses is abbreviated as OPEX, particularly in internal documents or communications about company earnings. The most common operating expense is employee salaries and benefits, which is often the largest single expense for a business. Other items that may be included in a list of expenses are advertising and marketing costs, office supplies, legal and licensing fees, office utilities and accounting fees, research and development costs and raw materials.

Depreciation, which is the amount of value an asset loses over time, is also considered an operating expense. When the asset, such as a vehicle or a piece of equipment, becomes worth less than its original purchase price, an accountant can subtract the new, lesser value from the initial value and count what is left as depreciation. This becomes an operating expense as long as the items are still used, in some way, in a business' operations.

One-time costs related to the business are usually considered capital expenses (CAPEX). This includes expenses such as the purchase of new equipment when old equipment has fully depreciated. The main reason for separating OPEX and CAPEX costs is that it gives the company, and any investors, a more detailed picture of where money is spent before it can be turned into profit. If a person is self-employed, he or she may consider both OPEX and CAPEX to be business expenses.

All publicly traded companies and non-profit organizations must include operating expenses information in their annual reports. Such information is typically illustrated with financial charts that compare operating expenses for the current calendar year to that of past years. This can help to give readers a clear picture of expenses over time.

The easiest way to have this information on hand in order to publish such reports is to continually track operating expenses throughout the year, either with the help of an accountant or by using financial management software. If the expenses vary greatly from year to year — especially if expenses rise — interested parties will want an explanation. Having detailed records can help determine the reasons behind such trends so that an explanation and solution to rising costs may be discovered. Offering such explanations and finding solutions is often the job of the company treasurer.