Operating expense

Published Friday 2 October 2026

Table of contents

• What is an operating expense?
• Types of operating expenses
• Why operating expenses matter
• Operating expenses versus overheads
• Track your operating expenses with Xero
• FAQs on operating expenses
• Related terms
• Learn more about operating expenses

Key takeaways

• Operating expenses (opex) are the ongoing, day-to-day costs of running a business, recorded on the profit and loss statement in the period they’re incurred.
• They’re different from capital expenditure, which covers one-off purchases of long-term assets you’ll use for years.
• Common examples include rent, utilities, salaries, insurance, software subscriptions, and marketing.
• Tracking opex accurately shows your true profit and helps you claim the right deductions when reporting to Revenue.

What is an operating expense?

Operating expenses, often shortened to opex, are the ongoing, day-to-day costs of running a business. You record them on the profit and loss statement in the period you incur them, so they sit alongside the income they help generate. The Corporate Finance Institute describes opex as the costs a business takes on to run its everyday operations.

Opex is different from capital expenditure, the one-off cost of buying a long-term asset such as a vehicle or a building. Day-to-day running costs are opex, while big purchases that keep their value for years are capex. For a fuller breakdown, see the difference between opex and capex.

Types of operating expenses

Operating expenses are commonly divided into six categories. Each one groups a different kind of running cost so you can see where your money goes.

• Cost of goods sold (COGS), or cost of sales, is the money spent providing your goods or services, such as inventory and freight; some businesses also record production wages or the rent for a dedicated production space here. On the profit and loss statement, COGS often sits on its own line, separate from your other operating expenses.
• Selling, general and administrative (SG&A) costs aren’t tied to the product itself, and cover things like business travel, sales commissions, manager salaries, and general admin.
• Depreciation and amortisation record the falling value of assets the business owns. Depreciation covers physical items that wear out, like tools, while amortisation covers non-physical assets such as a patent nearing expiry. You can read more about how depreciation works.
• Interest counts only for the interest portion of a loan repayment; the principal is recorded separately as a finance expense.
• Income taxes charged on business profits are recorded as an expense, though VAT usually isn’t, because that money never belonged to the business.
• Miscellaneous covers anything that doesn’t fit the categories above.

Some categories, such as depreciation, follow strict rules, while others give you more discretion. One business might record certain wages in COGS while another puts them in SG&A. The main thing is to stay consistent once you’ve set a rule.

Everyday operating expenses a small business will recognise include:

• rent for premises or equipment
• utilities such as electricity, broadband and heating
• salaries and wages for your team
• insurance cover for the business
• software subscriptions, including your accounting tools
• marketing and advertising

Why operating expenses matter

Operating expenses do more than record spending. They shape three things every small business owner cares about.

• The higher your operating costs, the less profit you keep, so watching them closely protects your margins.
• Because opex lowers your profit, it also lowers the tax you owe, and recording it correctly keeps you from paying more than you need to.
• Revenue takes a close interest in how expenses are reported, so there are rules worth following.

Operating expenses versus overheads

You’ll often hear people describe costs like rent, insurance, and utilities as ‘overheads’. It’s a term worth using with care.

Some people treat overheads as fixed costs, while others use the word to mean indirect costs, and the two aren’t the same. To keep your accounts clear and consistent, it’s simplest to stick to the six categories of operating expenses above, and to understand how to manage business overheads before leaning on the looser label.

Track your operating expenses with Xero

When your operating expenses sit in one place, it’s easy to see what you’re spending and how it affects your profit. Xero’s online accounting software lets you record bills, track your business expenses, and watch your profit and loss update as money moves. Sign up and get one month free to see your numbers clearly from day one.

FAQs on operating expenses

Still have questions about operating expenses? Here are quick answers to the ones small business owners ask most.

Are operating expenses tax deductible in Ireland?

Yes. Expenses incurred wholly and exclusively for your trade are generally allowable deductions that reduce the profit you pay tax on, according to Revenue. Keep receipts and records so you can support each claim.

What’s the difference between operating expenses and capital expenditure?

Operating expenses are the recurring costs of running the business day to day, while capital expenditure buys long-term assets you’ll use for years. Opex is claimed in the period it’s incurred, whereas capital costs are written down over the asset’s useful life and claimed through capital allowances rather than deducted outright, as PwC’s Ireland tax summary explains.

Are salaries an operating expense?

Usually yes. Staff salaries and wages are operating expenses, though they can sit under COGS or SG&A depending on whether the person works directly on your product or in a support role.

How can I reduce my operating expenses?

Review recurring costs regularly, renegotiate supplier contracts, and cancel subscriptions you no longer use. Real-time expense tracking makes it easier to spot where money leaks before it adds up.

Related terms

• Expense
• Capital expenditure
• Fixed cost
• Balance sheet

Learn more about operating expenses

• Small business accounting basics
• How to measure profitability
• Net operating profit after tax (NOPAT)