Operating expenses (opex)

Published Thursday 6 August 2026

Table of contents

• What are operating expenses?
• Categories of operating expenses
• Operating expenses vs capital expenditures
• Fixed and variable operating expenses
• How to calculate operating expenses
• Why operating expenses matter
• How to reduce operating expenses
• Avoid calling expenses overheads
• Manage your operating expenses with Xero
• FAQs on operating expenses
• Related terms
• Learn more about operating expenses

Key takeaways

• Operating expenses (opex) are the everyday costs of running a business, and they are recorded on the profit and loss statement.
• They usually fall into six categories: cost of goods sold, sales general and administration, depreciation and amortisation, interest, income taxes, and miscellaneous.
• The operating expense ratio, which is operating expenses divided by revenue, shows how much of your income goes on running the business.
• Lower operating expenses generally mean more profit, so tracking and managing them is a direct way to improve performance.

What are operating expenses?

Operating expenses, often shortened to opex, are the costs of doing business. They cover the day-to-day running of your company and are recorded on the profit and loss statement. Rent, wages, insurance and freight are all typical examples.

Each item is a business expense you incur to keep trading, rather than money spent buying long-term assets. That distinction matters for how the cost is recorded, and it is covered further down this page.

Categories of operating expenses

Operating expenses are commonly divided into six categories. Setting a clear rule for each one keeps your reporting consistent from year to year.

• Cost of goods sold (COGS) or cost of sales (COS): money spent providing your goods or services to customers, which typically includes inventory and freight. Some businesses also record wages, or rent for a dedicated production facility, under cost of goods sold
• Sales general and administration (SG&A): costs that are not tied up in the product or service itself, such as business travel, sales commissions, salaries for managers, software subscriptions and general admin
• Depreciation and amortisation: the diminishing value of assets the business owns, recorded as a cost; depreciation applies to physical things that wear out, like tools, while amortisation applies to non-physical assets, like a patent that loses value as it nears expiry
• Interest: only the interest portion of a loan repayment counts here, because the principal is recorded separately as a finance expense
• Income taxes: profits tax charged on business profits is recorded as an expense. Hong Kong has no sales tax, VAT or GST, so there is no consumption tax to record here; businesses report and pay profits tax to the Inland Revenue Department
• Miscellaneous: anything that does not fit the categories above is captured here

Some categories, such as depreciation, follow strict rules. Others are more discretionary: one business might record an employee's wages in cost of goods sold, while another records them in SG&A. The main thing is to stay consistent once you have set a rule.

Operating expenses vs capital expenditures

Operating expenses and capital expenditures both involve spending money, but they are recorded differently. Getting the split right keeps your profit and your tax position accurate.

• Operating expenses cover the day-to-day running of the business, and you record the full cost in the period you incur it
• Capital expenditures (capex) are money spent on long-term assets, such as equipment or vehicles, that you use for more than one year

Because a capital asset is used over several years, its cost is spread across its useful life through depreciation rather than recorded all at once. That yearly depreciation charge is what shows up among your operating expenses.

Fixed and variable operating expenses

It helps to know which of your operating expenses stay steady and which move with sales. That makes costs easier to forecast and protects your margin when trading slows.

• Fixed operating expenses stay roughly the same regardless of how much you sell, such as rent and insurance
• Variable operating expenses rise and fall with your activity, such as freight and sales commissions

How to calculate operating expenses

You can work out your total operating expenses by adding up the cost in each category over a period:

Operating expenses = cost of goods sold + SG&A + depreciation and amortisation + interest + income taxes + miscellaneous costs

To see how heavy those costs are relative to sales, use the operating expense ratio:

Operating expense ratio = operating expenses ÷ revenue

A lower ratio means more of each dollar of revenue is left over as profit, so the ratio is a quick way to gauge how efficiently you are running the business.

Why operating expenses matter

Operating expenses shape your profit, your tax bill and your relationship with the tax office. They matter for three main reasons.

• They are money going out of the business, so the higher they are, the less profit you keep as net profit; monitoring and managing them can lift performance
• Because they lower profits, they also lower the profits tax you pay, so recording them incorrectly can mean paying more tax than you need to
• Because they affect tax, the tax office takes a close interest in how they are reported, and there are rules to follow

How to reduce operating expenses

Trimming operating expenses is one of the most direct ways to improve profit without needing to sell more. A few practical habits keep costs in check.

• Review recurring subscriptions and cancel the ones you no longer use
• Renegotiate supplier and vendor contracts as your volumes grow
• Automate manual admin so staff time goes to higher-value work
• Track spending against a budget so costs do not drift unnoticed

For more practical savings, work through these business cost saving ideas.

Avoid calling expenses overheads

You will hear people describe operating expenses as overheads, usually meaning rent, insurance and utilities. The term causes confusion, so it pays to be precise.

Some people treat overheads as fixed costs, while others treat them as indirect costs, and there are subtle differences between the two. Because of that inconsistency, it is a good idea to avoid the term and stick to the six categories of operating expenses listed above.

Manage your operating expenses with Xero

Clear expense tracking turns a pile of receipts into decisions you can act on. Xero records and categorises your costs as they happen, so you can see where your money goes and keep an eye on your operating expense ratio. When you are ready to take control of your costs, get one month free and put tidy expense tracking to work for your business.

FAQs on operating expenses

Here are quick answers to common questions about operating expenses.

Is rent an operating expense?

Yes. Rent is a day-to-day cost of running the business, so it sits within operating expenses, usually under SG&A or as a fixed cost.

What is the difference between operating expenses and capital expenditures?

Operating expenses are recorded in full in the period you incur them, while capital expenditures buy long-term assets whose cost is spread over several years through depreciation.

Are operating expenses tax-deductible in Hong Kong?

Expenses incurred to produce assessable profits are generally deductible against profits tax, which lowers the tax you pay. Check the Inland Revenue Department rules or an adviser for your specific costs.

What is a good operating expense ratio?

A lower operating expense ratio leaves more revenue as profit, but a healthy level varies widely by industry, so it is most useful to track your own ratio over time.

Is depreciation an operating expense?

Yes. The yearly loss in value of assets you own is recorded as depreciation, which is one of the six categories of operating expenses.

Related terms

• Gross profit
• Profit margin
• Profitability
• Margin vs markup

Learn more about operating expenses

• Understanding your financial statements
• How to measure profitability
• A guide to profitability ratios