How to Find and Calculate Operating Expenses

Operating expenses represent the everyday costs a business incurs to keep its doors open and generate revenue. These expenditures are distinct from the direct costs of producing goods or services, known as Cost of Goods Sold (COGS), and are fundamental to understanding a company’s financial health and operational efficiency. By analyzing operating expenses, businesses and stakeholders can gain insights into how effectively a company manages its day-to-day activities.

Defining Operating Expenses

Operating expenses, often abbreviated as OpEx, are the costs a business incurs through its normal business operations. These are the expenditures necessary to run the core activities of a company, excluding the direct costs of creating a product or service (COGS) and any non-operating expenses.

Common examples of operating expenses include salaries and wages for administrative staff, rent for office or retail space, utility bills, marketing and advertising costs, and administrative expenses like office supplies and legal fees. Depreciation and amortization, which account for the gradual loss of value of assets over time, are also considered operating expenses.

Identifying Operating Expenses on Financial Statements

To locate operating expenses, one should primarily consult a company’s income statement, also known as the profit and loss (P&L) statement. This financial document summarizes a company’s revenues and expenses over a specific period. On a multi-step income statement, operating expenses are presented after the gross profit line.

Operating expenses are often grouped into categories such as Selling, General, and Administrative (SG&A) expenses. SG&A encompasses a wide range of indirect costs, including marketing expenses, administrative salaries, rent, and utilities. Some companies may also list specific operating expenses like research and development (R&D) separately. While the income statement provides the primary overview, additional details about these expenses can be found in the notes accompanying the financial statements.

Calculating Total Operating Expenses

Calculating total operating expenses involves summing all individual operating expense line items identified on the income statement. This aggregation provides a comprehensive figure for the costs incurred in running the business’s core operations. For instance, if a company lists salaries, rent, utilities, and marketing as its operating expenses, the total would be the sum of these amounts.

A simple formula for this calculation is: Total Operating Expenses = Sum of all individual operating expenses. It is crucial to ensure that only true operating costs are included and that non-operating expenses, such as interest paid on debt, or the Cost of Goods Sold, are excluded from this sum to maintain accuracy. This precise calculation helps in assessing the operational efficiency and profitability derived solely from a company’s primary business activities.