Operating expenses (OpEx) are the costs of running the business that are not directly attributable to producing goods or services. They include rent, utilities, insurance, administrative salaries, marketing, office supplies, software subscriptions, professional fees, and depreciation.
The distinction between cost of goods sold (direct costs) and operating expenses (indirect costs) matters for understanding profitability:
- Revenue − COGS = Gross profit (how efficiently the business produces)
- Gross profit − Operating expenses = Operating income (how efficiently the business runs overall)
A business can have strong gross margins (efficient production) but still lose money if operating expenses are too high — too much rent, too many administrative staff, too much spent on marketing relative to revenue.
Operating expenses are often categorized as fixed (don’t change with sales volume — rent, insurance, loan payments) or variable (change with sales volume — utilities, supplies, part-time labor). Understanding which expenses are fixed vs. variable is essential for break-even analysis and for knowing how much revenue decline the business can absorb before losing money. See Reading Financial Statements.