What are operating expenses? Definition and FAQs

Published Monday 13 October 2025

Table of contents

• Operating expense definition
• How to calculate operating expenses
• Operating vs non-operating expenses
• How to manage operating expenses effectively
• Streamline your expense management with Xero
• FAQs on operating expenses

Key takeaways

• Calculate your operating expenses by adding cost of goods sold (COGS) and sales, general and administrative expenses (SG&A) to get a clear picture of your core business running costs.

• Review your spending regularly to identify unnecessary subscriptions, price increases from suppliers, and opportunities to negotiate better terms or switch to more affordable alternatives.

• Categorise your operating expenses consistently across the six main types (COGS, SG&A, depreciation, interest, taxes, and miscellaneous) to ensure accurate financial reporting and tax compliance.

• Use technology to automate expense tracking and gain real-time visibility into your spending patterns, which helps you make smarter financial decisions and improve profitability.

Operating expense definition

Operating expenses are the day-to-day costs of running your business. They include all expenses except for interest and asset impairment. These expenses include rent, wages, inventory and marketing. You record these costs on your profit and loss statement, and they affect your business profits.

Operating expenses usually fall into 6 main categories:

1. Cost of goods sold (COGS): direct costs to produce your products or services, such as inventory, materials and production wages
2. Sales, general and administrative expenses (SG&A): indirect business costs, such as office rent, marketing, management salaries and administrative expenses
3. Depreciation and amortisation: the reduction in value of business assets over time. Depreciation applies to physical assets, while amortisation applies to intangible assets.
4. Interest expenses: interest payments on business loans and credit
5. Income taxes: taxes on business profits
6. Miscellaneous expenses: other business costs that do not fit the above categories

Categorisation flexibility: Some expenses can fit more than one category. For example, wages might be included in cost of goods sold or sales, general and administrative expenses, depending on the role. The key is to be consistent – once you choose a category for an expense type, stick with it for accurate financial reporting.

Why operating expenses matter

Business profitability: When you keep operating expenses under control, you can increase your profits. Tracking and managing these costs helps improve your bottom line.

Tax efficiency: When you record operating expenses correctly, you can reduce your taxable income and pay only the tax you need to.

Compliance requirements: Tax authorities check how you report expenses. When you categorise expenses accurately, you meet requirements and may be able to use simpler reporting standards if your total expenses are $5 million or less.

How to calculate operating expenses

Calculating your operating expenses is straightforward. You’ll find the numbers you need on your business’ income statement. The formula is:

Operating expenses = cost of goods sold (COGS) + sales, general and administrative expenses (SG&A)

This gives you a clear picture of what it costs to run the core parts of your business, before considering things like interest or taxes.

Operating vs non-operating expenses

It helps to know the difference between operating and non-operating expenses. Operating expenses relate to your main business activities, such as rent or payroll. Non-operating expenses are costs not related to your daily operations.

Non-operating expenses include:

• Interest on loans
• Losses from selling an asset
• Costs from restructuring the business

Separating these helps you see how well your core business is performing, focusing on your main activities.

How to manage operating expenses effectively

Keeping your operating expenses in check helps you improve profitability. Here are a few simple steps to manage them:

1. review your spending regularly to spot unnecessary subscriptions or price increases from suppliers
2. look for opportunities to save, such as switching to a more affordable supplier or negotiating better terms
3. use technology to automate expense tracking and get a real-time view of your spending

Streamline your expense management with Xero

When you understand and manage your operating expenses, you can make smarter decisions, improve your cash flow and focus on growth. Clear, up-to-date information helps you stay in control.

Ready to take control of your business finances? Xero makes it easy. Try Xero for free to simplify expense tracking and get a clear view of your business performance.

FAQs on operating expenses

Here are answers to some common questions about operating expenses.

What are some common examples of operating expenses?

Common examples include rent for your office or shop, employee wages and salaries, utility bills like electricity and internet, marketing and advertising costs, office supplies, and insurance premiums.

Are employee salaries an operating expense?

Yes, salaries and wages for employees involved in the daily running of the business are a major part of operating expenses, usually falling under sales, general and administrative expenses (SG&A). For example, personnel expenses for New Zealand’s registered banks grew to $1,091 million in the June 2025 quarter.

What is excluded from operating expenses?

Items excluded from operating expenses are typically costs not related to the core business activities. This includes interest paid on loans, income taxes, costs of buying or selling major assets, and any one-off costs from events like a business restructure.