What are operating expenses?

Published Thursday 23 July 2026

Table of contents

• What are operating expenses?
• Types of operating expenses
• Examples of operating expenses
• Fixed vs variable operating expenses
• Operating expenses vs capital expenses (opex vs capex)
• Operating vs non-operating expenses
• How to calculate operating expenses
• Operating expense ratio (OER)
• Are operating expenses tax deductible in Australia?
• Why operating expenses matter
• How to reduce operating expenses
• Track your operating expenses with Xero
• FAQs on operating expenses

Key takeaways

• Operating expenses (opex) are the day-to-day costs of running your business, and you record them on your profit and loss statement.
• Common examples include rent, wages and salaries, utilities, insurance, marketing, and software subscriptions.
• Operating expenses differ from capital expenses, which buy long-term assets and are depreciated over time on the balance sheet.
• Most operating expenses are tax deductible in Australia when they’re incurred in earning assessable income, so keeping accurate records matters.

What are operating expenses?

Operating expenses (opex) are the costs of doing business day to day. You record them on your profit and loss statement, where they reduce your operating profit.

These are the recurring costs you take on to keep the business running, separate from the money you spend to buy long-term assets. Tracking them clearly helps you see where your money goes and how much it costs to earn your revenue.

Types of operating expenses

Operating expenses are usually grouped into a handful of categories so you can report them consistently. Most businesses sort their opex into the following 6 types.

• Cost of goods sold (COGS), also called cost of sales (COS): the direct costs of producing the goods or services you sell
• Sales, general and administration (SG&A): running costs such as rent, wages, and office overheads
• Depreciation and amortisation: the spread-out cost of assets that lose value over time
• Interest: the cost of money you’ve borrowed to fund the business
• Income taxes: tax charged on your business income
• Miscellaneous: smaller costs that don’t fit neatly into the other categories

Once you set a rule for how you classify a cost, apply it the same way every period. Being consistent keeps your reports comparable and makes tax time simpler.

Examples of operating expenses

Operating expenses cover most of the regular bills you pay to keep trading. Here are common examples for an Australian small business.

• Rent for premises or a workspace
• Utilities such as electricity, gas, water, and internet
• Wages and salaries for your team
• Insurance, including public liability and business cover
• Marketing and advertising
• Office supplies and stationery
• Software subscriptions and cloud tools
• Professional fees for accountants, bookkeepers, and legal advice

Fixed vs variable operating expenses

Operating expenses fall into 2 groups: fixed costs that stay roughly the same each period, and variable costs that rise and fall with your activity. Knowing which is which helps you plan cash flow and spot where you can adjust spending.

Fixed operating expenses stay steady regardless of how much you sell, so you can budget for them with confidence.

• Rent and lease payments
• Insurance premiums
• Salaried wages
• Software subscriptions

Variable operating expenses move up or down with your sales volume and workload.

• Raw materials and stock
• Shipping and delivery costs
• Sales commissions
• Casual or overtime wages during busy periods

Operating expenses vs capital expenses (opex vs capex)

Operating expenses are the day-to-day running costs recorded on your profit and loss statement. Capital expenses are money spent to acquire or upgrade long-term assets, recorded on the balance sheet and depreciated over time.

The difference matters for both reporting and tax. You claim most operating expenses in the year you incur them, while capital expenditure is spread across the useful life of the asset through depreciation.

For example, paying this month’s electricity bill is opex. Buying a delivery van you’ll use for years is capex.

Operating vs non-operating expenses

Operating expenses come from your core business activities, while non-operating expenses sit outside them. Non-operating expenses include costs like interest on borrowing and one-off charges that aren’t part of everyday trading.

Separating the two shows how your core business performs before financing and irregular costs muddy the picture. It gives you a cleaner read on whether your day-to-day operations are profitable.

You might hear these costs called “overheads”, but that word is used loosely: some people mean fixed costs, while others mean indirect costs. To avoid confusion, it’s clearer to use the operating-expense categories above.

How to calculate operating expenses

To calculate your operating expenses, add up the operating-expense line items on your profit and loss statement. A common approach sums COGS, SG&A, and depreciation and amortisation, excluding interest and tax when you want to measure operating costs alone.

You can work through it in a few steps.

1. List each operating-expense line item for the period
2. Set aside interest and income tax if you’re measuring operating costs only
3. Add the remaining items together to get your total operating expenses

As a worked example, say your COGS is $120,000, your SG&A is $60,000, and your depreciation and amortisation is $20,000. Your total operating expenses come to $200,000 for the period.

Operating expense ratio (OER)

The operating expense ratio (OER) shows how much of your revenue goes towards running the business. You calculate it by dividing operating expenses by revenue, then expressing the result as a percentage.

Using the figures above, $200,000 in operating expenses against $400,000 in revenue gives an OER of 50%. A lower ratio suggests you’re keeping costs under control relative to what you earn, which usually points to stronger operating efficiency.

You’ll find the figures you need on your profit and loss statement, so it’s worth reviewing the ratio each period to track the trend.

Are operating expenses tax deductible in Australia?

Yes, in most cases. Under the general deduction rule, businesses can claim most operating expenses incurred in earning assessable income.

Capital expenses are treated differently: rather than claiming the full cost upfront, you generally depreciate the asset over time. For the detail on what you can and can’t claim, see the ATO’s rules on business deductions.

Keep records to substantiate every claim, including receipts, invoices, and bank statements. This is general information, not tax advice, so check your own circumstances with your accountant or the ATO.

Why operating expenses matter

Operating expenses shape both your profitability and your tax position, so they’re worth watching closely. There are 3 main reasons they matter.

• They reduce your profit, so higher opex leaves less at the bottom line
• They can lower your tax when recorded correctly, since most are deductible
• They affect compliance, because the ATO cares how you report and substantiate them

Cost pressure is a live issue for many businesses. According to the Australian Bureau of Statistics, 46% of Australian businesses reported higher operating expenses in the four weeks to June 2026, with fuel prices and business overheads the most common causes.

How to reduce operating expenses

Reducing operating expenses is one of the most direct ways to improve your profitability. A few practical habits can bring your costs down without hurting the business.

• Review your costs regularly to catch spending that’s crept up
• Renegotiate with suppliers and shop around for better rates
• Automate admin tasks to save time and reduce errors
• Track every expense so nothing slips through unnoticed

Small savings across several categories add up, and they flow straight through to your operating profit. Software makes it easier to track business expenses so you always know where your money goes.

Track your operating expenses with Xero

Keeping on top of your operating expenses is far simpler when your costs, bills, and reports live in one place. Xero captures your expenses, updates your profit and loss statement in real time, and gives you a clear view of what it costs to run your business.

See how it fits your business and get one month free when you start.

FAQs on operating expenses

Here are answers to frequently asked questions about operating expenses.

Are salaries an operating expense?

Yes, wages and salaries are operating expenses because they’re a regular cost of running your business. You record them on your profit and loss statement.

What is the difference between opex and capex?

Opex covers day-to-day running costs claimed in the year you incur them. Capex buys long-term assets that sit on the balance sheet and are depreciated over time.

Are operating expenses tax deductible?

In Australia, you can claim most operating expenses incurred in earning assessable income under the general deduction rule. Keep records such as receipts and invoices to substantiate your claims.

What is a good operating expense ratio?

A lower operating expense ratio generally signals stronger cost control relative to revenue. What counts as good varies by industry, so compare against businesses like yours.

Is rent an operating expense?

Yes, rent for your premises or workspace is a common operating expense. It’s usually a fixed cost that stays steady from period to period.