How to Calculate Total Operating Expenses

Calculating total operating expenses is fundamental for understanding a business’s financial health and profitability. These expenses represent the ongoing costs a business incurs to run its day-to-day operations. Identifying and calculating these costs provides insight into operational efficiency and impacts profitability, aiding informed decisions.

What Are Operating Expenses

Operating expenses are costs a company incurs for its regular business activities, distinct from direct production costs (Cost of Goods Sold, or COGS). They are necessary for a business to function and generate revenue, reflecting the costs of keeping the business running regardless of production levels.

Operating expenses differ from non-operating expenses, which are unrelated to the core business, such as interest expense or income taxes. They also differ from capital expenditures, which are investments in long-term assets like property or equipment. Common examples include salaries, rent, utilities, marketing, and administrative costs. These expenses can be fixed, remaining consistent regardless of sales volume, or variable, fluctuating with business activity.

Sources of Operating Expense Information

The primary source for identifying operating expenses is a company’s income statement, also known as a profit and loss (P&L) statement. This financial document lists revenues and expenses over a specific period, such as a quarter or a year. On the income statement, operating expenses are presented below the gross profit line, showing profitability from core operations.

Operating expenses may appear as a single consolidated line item or be broken down into major categories. Many businesses report a combined line for Selling, General, and Administrative (SG&A) expenses. Smaller businesses might track these expenses through accounting software, ledgers, or records of invoices and receipts.

Performing the Calculation

Calculating total operating expenses involves a straightforward summation of all individual operating costs. Once extracted from financial statements or other records, the process is simply adding them together. This calculation provides a clear figure representing the total cost incurred to run day-to-day operations.

The basic formula is: Total Operating Expenses = Sum of all individual operating expenses. For example, if a business had $5,000 in salaries, $1,500 in rent, $300 in utilities, and $700 in marketing costs for a period, total operating expenses would be $7,500. This sum represents the aggregate cost of maintaining business operations.

Common Categories of Operating Expenses

Businesses incur various operating expenses, grouped into common categories. Selling, General, and Administrative (SG&A) expenses often represent a significant portion of a company’s non-production related costs. This category includes expenses for selling products, managing the business, and general overhead. Components typically include salaries for non-production staff, office rent and utilities, and marketing costs. Other items like office supplies, travel, and professional fees also fall under SG&A.

Depreciation and amortization are common operating expenses, even though they are non-cash. Depreciation allocates the cost of tangible assets, like machinery, over their useful life. Amortization does the same for intangible assets such as patents or software. These expenses reflect the consumption of an asset’s economic benefits over time. Research and Development (R&D) expenses, incurred to innovate or improve products, are another type of operating expense.