Key Takeaways

• OpEx covers the costs of running the business outside direct production. Common examples include administrative payroll, rent, sales and marketing costs, software subscriptions, insurance, and professional services.
• COGS and OpEx should stay separate when the income statement reports gross profit. COGS reduces revenue to gross profit, then OpEx reduces gross profit to operating income.
• The cleanest OpEx formula is gross profit minus operating income. Finance can also total the operating-expense lines presented below gross profit.
• Classification affects planning, margins, and tax timing. A cost may require different treatment based on its function, accounting policy, and applicable tax rules.
• Limelight connects planning, source data, drivers, reports, and dashboards. Finance teams can use the same connected data to budget expenses, review actuals, and investigate variances.

Operating expenses, or OpEx, are the costs a business incurs to run its day-to-day operations outside the direct costs assigned to producing goods or delivering services. They commonly include administrative payroll, rent, sales and marketing spend, software subscriptions, insurance, and professional services.

On a multi-step income statement, OpEx usually appears below gross profit and above operating income. Clear classification matters because the same cost structure feeds budgeting, margin analysis, forecasting, and cost-control decisions.

In this guide, you’ll learn what counts as an operating expense, how to calculate OpEx, how it differs from other major cost categories, and how FP&A teams can plan and manage these costs.

What Counts as an Operating Expense?

An operating expense supports the ongoing functions needed to run the business. The exact presentation varies by company and industry, so finance teams should follow a consistent chart of accounts and accounting policy rather than classify costs by name alone.

Common operating expense categories

• Administrative salaries, payroll taxes, and employee benefits
• Office rent, utilities, property insurance, and routine facility costs
• Sales commissions, advertising, events, and other selling costs
• Corporate software subscriptions and cloud tools
• Legal, accounting, consulting, and other professional services
• Office supplies, telecommunications, and general administrative costs
• Repairs and maintenance for non-production assets
• Depreciation and amortization associated with operating functions, depending on presentation

Personnel often represents a large share of controllable OpEx. A separate headcount planning process helps finance connect salary, benefits, hiring dates, vacancies, and compensation changes to the expense forecast instead of carrying one payroll number forward.

SG&A is a major OpEx category, while total OpEx can be broader

Selling, general, and administrative expenses, or SG&A, combine selling costs with corporate overhead such as executive payroll, legal fees, finance costs, and office expenses. Some companies also report research and development, restructuring charges, or other operating costs on separate lines. For this reason, total OpEx should follow the operating-expense lines used in the company's own financial statements.

Nonprofits classify the same costs by function instead, reporting program, management and general, and fundraising categories; see our guide to nonprofit operating expenses.

How OpEx Differs From COGS, CapEx, and Non-Operating Expenses

The label attached to a cost affects where it appears in the financial statements and what a reader can infer from gross margin, operating margin, and cash flow. The most useful test is to ask what the cost supports and how the company presents the related activity.

Four expense categories at a glance

Table: COGS, OpEx, CapEx, and non-operating expenses affect different parts of the financial statements and should remain separately classified.

A capital expenditure differs from OpEx because the initial spend creates or improves a long-lived asset rather than being recognized entirely as a current-period operating cost. The accounting treatment depends on the relevant standards and the company's capitalization policy.

Planning that spend is its own workflow; see our guide to capex planning.

Cost of goods sold (COGS) and OpEx should stay separate when the income statement reports gross profit. A software engineer working directly on service delivery may sit in cost of revenue, while a finance analyst's salary normally sits in OpEx. Consistency matters because moving costs between COGS and OpEx changes gross margin even when operating income stays unchanged.

Fixed, Variable, and Semi-Variable Operating Expenses

Classifying OpEx by cost behavior helps finance forecast how spending responds when activity changes. These categories describe how a cost moves, while COGS versus OpEx describes where the cost belongs on the income statement.

Fixed operating expenses

Fixed OpEx stays relatively stable within a relevant activity range.

• Office rent or lease payments
• Insurance premiums
• Base administrative salaries
• Fixed-price software subscriptions
• Property taxes

A fixed cost can still change after a contract renewal, hiring decision, or capacity step-up. "Fixed" describes short-term cost behavior within a relevant operating range.

Variable operating expenses

Variable OpEx changes with an operating driver.

• Sales commissions linked to booked or recognized revenue
• Performance-marketing spend tied to campaign volume
• Usage-based corporate software fees
• Business travel tied to sales or service activity
• Temporary administrative labor used during peak periods

Some costs can move between COGS and OpEx depending on function. Finance should classify the cost first, then model its fixed or variable behavior.

Semi-variable operating expenses

Semi-variable costs combine a committed base with a usage-sensitive component.

• Telecommunications plans with base fees and usage charges
• Utilities with service charges plus consumption
• Compensation plans with base salary plus commission
• Software contracts with a platform fee plus usage charges

Separating the fixed and variable pieces makes scenario analysis more useful because finance can model each driver independently.

How to Calculate Operating Expenses

Finance can calculate OpEx from the income statement or build it from the underlying expense accounts. Both methods should reconcile to the same total when the classification is consistent.

Operating expense formulas

For a multi-step income statement:

Operating Expenses = Gross Profit - Operating Income

Since gross profit equals revenue minus COGS:

Operating Expenses = Revenue - COGS - Operating Income

For a bottom-up calculation:

Operating Expenses = Sum of all operating-expense line items outside COGS

Depending on the company's presentation, the bottom-up total may include SG&A, research and development, sales and marketing, and other operating costs. OpenStax's Principles of Finance uses the same income-statement sequence: operating expenses are deducted from gross profit to arrive at operating income.

Teams building a cost-center model can start with Limelight's operating expenses template and adapt the categories to their own chart of accounts.

Hypothetical monthly OpEx example

The following example uses a mid-market company's monthly operating costs. The figures are illustrative.

Table: The hypothetical company records $762,000 of monthly operating expenses across sales, software, facilities, marketing, professional services, G&A, and insurance.

Assume monthly revenue is $3,000,000 and COGS is $1,500,000.

Gross Profit = $3,000,000 - $1,500,000 = $1,500,000

Operating Income = $1,500,000 - $762,000 = $738,000

Operating Expense Ratio = $762,000 / $3,000,000 × 100 = 25.4%

Operating Margin = $738,000 / $3,000,000 × 100 = 24.6%

The two percentages answer different questions. The operating expense ratio measures the share of revenue consumed by OpEx, while operating margin measures the share left as operating income after COGS and OpEx.

How to interpret the operating expense ratio

A useful operating expense ratio depends on the business model, gross margin, growth stage, and cost classification. A software company with high gross margins can support a different OpEx structure from a manufacturer with heavy direct production costs.

Track the ratio against the company's own history and comparable peers with similar accounting classifications. A rising ratio may reflect overspending, planned investment ahead of revenue, weaker sales, or a change in where costs are classified. Use the ratio as a diagnostic signal, then inspect revenue and cost drivers for the cause.

Where Operating Expenses Appear on the Income Statement

On a multi-step income statement, OpEx sits between gross profit and operating income. This placement separates direct production or service-delivery costs from the broader cost of running the business.

Income-statement sequence

Table: A multi-step income statement separates COGS from OpEx so readers can evaluate gross profit and operating income independently.

A single-step income statement may present expenses differently and can omit gross profit or operating income as separate subtotals. The classification logic still matters for internal management reporting and margin analysis.

How to Manage and Reduce Operating Expenses

Cost control works best when finance can see the driver behind each expense instead of applying the same percentage cut across every department. The aim is to remove waste without cutting capacity needed for revenue, compliance, service delivery, or future plans.

1. Tie material expenses to measurable drivers

Build major expense lines around operational assumptions such as headcount, seats, locations, transaction volume, contract rates, or campaign plans. Driver-based planning makes the forecast easier to challenge because a reviewer can see what must change for the expense to move.

2. Review actuals against budget by cost center

A monthly budget variance analysis should identify the amount, owner, cause, and expected forward impact of a material variance. Finance can use a budget-versus-actual template when a lightweight spreadsheet process is sufficient.

3. Separate committed spend from discretionary spend

Long-term leases, contracted software, and approved headcount behave differently from travel, events, outside consulting, or discretionary programs. Separating the two groups helps leaders see which costs can change quickly and which require a contract, staffing, or capacity decision.

4. Review vendor and workforce commitments before renewal points

The useful moment to challenge a recurring cost is before the business becomes committed to the next period. Finance should maintain renewal dates, notice periods, headcount start dates, compensation changes, and major vendor assumptions alongside the forecast.

5. Escalate exceptions with a clear action path

Small favorable and unfavorable variances can create noise. Set materiality thresholds and define who owns the response. A material overspend may require a reforecast, spending freeze, contract action, or approved transfer from another budget line. A timing variance may require monitoring only.

Operating Expenses in FP&A

FP&A turns OpEx from a historical accounting total into a forward-looking plan. The work starts with cost ownership, then connects approved assumptions to actual results and revised forecasts.

1. Build the budget by cost center and driver

Each cost center should have an accountable owner and a small set of assumptions behind its material expenses. Headcount can use salary, start date, vacancy, bonus, and benefit assumptions. Software can use contract rates, seat counts, and renewal dates. Facilities can use lease terms, occupied space, and utility assumptions.

A zero-based budgeting process can go further by requiring decision packages for selected expenses. Decision packages belong to zero-based budgeting (ZBB) and similar cost-reset exercises rather than to every OpEx budget.

2. Explain variance at the driver level

A dollar variance becomes useful once finance can trace it to a cause. Common causes include headcount timing, higher rates, lower usage, added scope, delayed projects, or unplanned activity. This driver-level explanation separates timing issues from structural changes in the cost base.

3. Reforecast when the underlying assumption changes

A forecast should change when the business changes. A signed vendor renewal, delayed hire, new office opening, or updated sales plan can alter the expected run rate before the accounting period closes. Updating the assumption gives management a current view of full-year spend instead of waiting for the variance to appear in actuals.

Why Operating Expenses Matter

OpEx connects the income statement, budget, and operating plan. Finance teams use it to understand how much recurring capacity the company is funding and whether the cost base remains supportable as revenue and priorities change.

1. Profitability and margin analysis

Holding revenue and COGS constant, lower OpEx increases operating income dollar for dollar. The harder question is whether a reduction also removes productive capacity. Cutting sales coverage, security, compliance, or service capacity can protect one period's margin while creating a later revenue or risk problem.

2. Cash flow and liquidity

Many operating expenses create recurring cash payments, but expense recognition and cash timing can differ. Prepayments, accruals, payable terms, and non-cash items can separate the income-statement expense from the cash movement. Operating cash flow helps finance examine the cash generated and consumed by core operations alongside the OpEx view.

3. Tax and classification

For US federal tax purposes, IRC Section 162 generally permits deductions for ordinary and necessary expenses paid or incurred in carrying on a trade or business. The IRS also states that Section 263(a) can require capitalization of costs for acquiring, producing, or improving tangible property. See the IRS guidance on ordinary and necessary business expenses and tangible-property capitalization rules.

Tax treatment and financial-statement presentation are separate questions. A finance team should apply the relevant accounting policy and tax rules rather than assume every recurring operating cost receives the same treatment in both systems.

For a deeper planning workflow, see Limelight's OpEx planning guide.

How Limelight Supports OpEx Planning

Operating-expense planning becomes harder when budgets, enterprise resource planning (ERP) actuals, workforce assumptions, and variance explanations live in separate files. Limelight’s FP&A software connects budgeting, forecasting, reporting, dashboards, workforce planning, and ERP or accounting system data in one environment.

1. Connect source data to plans and reports

Limelight can centralize financial data from systems such as Sage Intacct, NetSuite, Microsoft Dynamics, QuickBooks, Oracle, and other supported sources. Finance can use connected data across budgets, forecasts, scenarios, and reports rather than rebuilding the same structures in separate spreadsheets.

2. Plan expenses with drivers and prebuilt templates

Limelight supports driver-based forecasting and offers prebuilt FP&A templates, including operating-expense, workforce, profit and loss (P&L), and variance-analysis use cases. This gives finance a starting structure while leaving the model tied to the company's own assumptions and account design.

3. Review actuals and variances in reports and dashboards

Connected reports and dashboards update as source data and planning assumptions change. Finance can review performance, investigate variances, and move from a summary view into the detail behind the numbers.

A sound OpEx process gives management two things at the same time: a clear current-period cost view and a defensible forecast of what those costs will become. The accounting classification provides the baseline. Drivers, owners, and variance explanations turn the baseline into a management tool.

Book a demo to see how Limelight handles expense planning, connected actuals, and variance reporting.

FAQs About Operating Expenses

Are depreciation and amortization operating expenses?

They can be. Classification depends on the function of the underlying asset and the company's presentation. Depreciation on production assets may be included in COGS, while depreciation on corporate assets may sit in OpEx. The expense should be included once and classified consistently.

What is a good operating expense ratio?

A useful benchmark comes from prior periods and peers with similar business models, gross margins, growth profiles, and accounting classifications. A change in the ratio should trigger an investigation into revenue, cost drivers, and classification before management treats it as an efficiency signal.

Can an operating cost be capitalized?

A cost described operationally may still meet capitalization criteria under the applicable accounting or tax rules. If a cost is capitalized, it is recorded as an asset initially and recognized through depreciation or amortization rather than being treated as a full current-period OpEx charge. Review material or unusual items under the company's accounting policy.

How should prepaid operating expenses be handled?

Cash paid in advance may be recognized over several periods. Items such as annual insurance or prepaid service contracts are generally recorded as prepaid assets and recognized as expenses over the periods in which the benefit is received, subject to the company's accounting policy and materiality rules.

Can the same type of cost be COGS for one company and OpEx for another?

Yes. Classification depends on what the cost supports. Cloud infrastructure used to deliver a SaaS product may be a cost of revenue, while cloud software used by the finance team is normally OpEx. Consistent classification is important for gross-margin comparability across periods.