How to Calculate Operating Expenses (OPEX)

Operating expenses, often called OpEx, are the costs a business incurs through its regular activities. These expenses are fundamental to maintaining day-to-day operations and generating revenue. Understanding how to calculate operating expenses is important for financial analysis. It provides insight into a company’s efficiency and its ability to manage costs, helping assess profitability and make informed financial decisions.

Identifying Operating Expenses

Operating expenses are costs directly related to a business’s core operations, but not to the direct production of goods or services. They are distinct from the Cost of Goods Sold (COGS), which represents direct expenses of producing items sold, such as raw materials and direct labor. For instance, rent for a manufacturing facility is an operating expense, while the cost of materials used in production is part of COGS.

Operating expenses also differ from capital expenditures (CapEx) and non-operating expenses. Capital expenditures involve investments in long-term assets like buildings or machinery, which provide benefits over multiple years and are depreciated over time. Operating expenses, conversely, are typically consumed within a single accounting period and are fully expensed when incurred. Non-operating expenses are costs not directly tied to a company’s primary business activities, such as interest payments on loans, losses from asset sales, or one-time legal settlements.

Common examples of operating expenses include salaries and wages for administrative and sales staff, office rent, utilities, marketing and advertising costs, insurance premiums, and administrative fees. Depreciation and amortization, which represent the expensing of long-term assets over their useful life, are also considered operating expenses. These expenses are necessary to keep the business running.

Gathering Financial Data

To calculate operating expenses, financial information is primarily found within a company’s financial statements. The income statement, also known as the profit and loss (P&L) statement, is the most important source for this data. It summarizes a company’s revenues and expenses over a specific period, such as a fiscal quarter or year.

Operating expenses are typically presented as line items or grouped categories on the income statement, appearing after the Cost of Goods Sold (COGS) and before operating income. These categories might include selling, general, and administrative (SG&A) expenses, which often encompass a wide range of operational costs like salaries, rent, and marketing. Companies may break out specific operating expenses like research and development separately.

For more detailed information or to verify specific expense amounts, a business’s general ledger serves as a comprehensive record. It contains every financial transaction, categorized into accounts like assets, liabilities, revenue, and expenses, allowing for granular insight into individual expense types if income statement figures are insufficient.

Performing the Calculation

Calculating total operating expenses involves a straightforward aggregation of all identified operating expense line items from the income statement for a specific period. The process simply requires summing these individual amounts. This summation provides a clear figure representing the total costs incurred to run the day-to-day operations of the business.

The basic formula for calculating total operating expenses is:
Total Operating Expenses = Sum of all individual operating expenses.

For example, if a business has monthly operating expenses of $5,000 for salaries, $1,500 for rent, $300 for utilities, and $700 for marketing, the calculation would involve adding these figures together. In this instance, the total operating expenses for the month would be $5,000 + $1,500 + $300 + $700, resulting in $7,500.

Once calculated, this total can be used to determine a company’s operating income by subtracting it from the gross profit. Operating income, also referred to as Earnings Before Interest and Taxes (EBIT), provides a measure of profitability directly from core business operations, excluding the impact of financing and taxes.