Operating expenses

Published Thursday 23 July 2026

Table of contents

• Operating expense definition
• Operating expenses vs capital expenses
• Fixed vs variable operating expenses
• 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
• Related Terms
• Learn more about operating expenses

Key takeaways

• Calculate your operating expenses by adding cost of goods sold (COGS) and sales, general and administrative expenses (SG&A). This shows what it costs to run the core of your business.
• Operating expenses are day-to-day running costs you deduct now, while capital expenses buy long-term assets and are spread over time through depreciation.
• Fixed costs stay roughly the same whatever your output, while variable costs rise and fall with how much you produce or sell.
• Review your spending regularly so you can trim waste, protect your profit margin and keep more cash in the business.

Operating expense definition

Operating expenses are the day-to-day costs of running your business, such as rent, wages, inventory and marketing. You record them on your profit and loss statement, where they directly affect your profit.

Operating expenses usually fall into three main categories.

• Cost of goods sold (COGS): the direct costs of making your products or services, such as materials and production wages
• Sales, general and administrative expenses (SG&A): indirect running costs, such as office rent, marketing and management salaries
• Depreciation and amortisation: the drop in value of your assets over time, covering both physical assets and intangible assets

Interest and income taxes sit outside these categories. They're usually treated as non-operating expenses, not operating expenses, because they fall outside your main trading activity.

Some costs can fit more than one category. Wages, for example, might sit in cost of goods sold or in sales, general and administrative expenses, depending on the role. Once you pick a category for a cost type, stick with it so your reporting stays consistent.

Why operating expenses matter

Tracking operating expenses closely gives you more control over profit and tax. Here's why it's worth getting right.

When you keep operating expenses under control, you protect your margins and grow your profit. Recording them accurately also lowers your taxable income, so you pay only the tax you owe.

Accurate categorisation keeps your reporting compliant and helps you meet Inland Revenue requirements, which reduces the risk of errors at tax time.

Operating expenses vs capital expenses

It helps to know how everyday costs differ from big asset purchases. The difference changes how and when you claim each cost.

Operating expenses (opex) are the day-to-day running costs you deduct in full in the period you incur them, such as rent or monthly software subscriptions. Capital expenses (capex) are amounts you spend buying or improving long-term assets, such as a delivery van or new machinery, and you spread that cost over time through depreciation.

Fixed vs variable operating expenses

Operating expenses also split into fixed and variable costs. Knowing which is which helps you plan for busy and quiet periods.

Fixed costs stay roughly the same regardless of how much you produce or sell. Common fixed costs include:

• rent for your premises
• insurance premiums
• salaries for permanent staff

Variable costs rise and fall with your activity, so they grow when you're busy. Common variable costs include:

• raw materials
• shipping and delivery
• payment processing fees

How to calculate operating expenses

Working out your operating expenses is straightforward once you know the formula. You'll find the numbers you need on your income statement, also called your profit and loss statement.

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

Depreciation and amortisation usually sits within these two groupings, so the three main categories still add up to the same total.

To reach your operating profit, subtract operating expenses from your revenue. This shows what your core business costs to run before interest and tax. Your cost of goods sold feeds directly into this figure.

To benchmark your spending over time, divide operating expenses by revenue to get your operating expense ratio. A lower ratio means more of each dollar of revenue stays in the business.

Operating vs non-operating expenses

Separating operating from non-operating expenses shows how well your core business performs. Operating expenses relate to your main activities, such as rent or payroll, while non-operating expenses fall outside daily operations.

Non-operating expenses include:

• interest on loans
• losses from selling an asset
• costs from restructuring your business

Keeping these separate lets you focus on the costs you can actively manage day to day.

How to manage operating expenses effectively

Keeping your operating expenses in check helps you protect profit and free up cash. Wages are one of the largest operating expenses for most businesses. According to Xero Small Business Insights, wages across New Zealand small businesses rose 2.2% in the March quarter, still below the long-run average of 3.6% a year.

Here are three steps to manage your operating expenses.

1. Review your spending regularly to spot unnecessary subscriptions or price rises from suppliers.
2. Look for savings, 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 and stay in control of your numbers. Clear, up-to-date information helps you plan ahead with confidence.

Xero brings your expenses together in one place so you can track spending, improve your cash flow and focus on growth. Get one month free.

FAQs on operating expenses

Here are answers to some frequently asked questions about operating expenses.

What are some common examples of operating expenses?

Common examples include rent, employee wages, utility bills, marketing, office supplies and insurance premiums. These are the recurring costs of keeping your business running each day.

Are employee salaries an operating expense?

Yes. Salaries and wages for staff involved in running the business are usually an operating expense, most often recorded under sales, general and administrative expenses (SG&A).

What is the difference between operating expenses and capital expenses?

Operating expenses are day-to-day running costs you deduct in the period you incur them. Capital expenses buy long-term assets, so you spread the cost over time through depreciation.

What is excluded from operating expenses?

Operating expenses exclude interest on loans, income taxes and the cost of buying or selling major assets. They also exclude one-off costs from events like a business restructure.

Related Terms

• Opex vs capex
• Profit and loss statement
• Operating profit
• Cost of goods sold (COGS)
• Gross profit

Learn more about operating expenses

• How to measure profitability
• How to increase profits
• What is profit margin
• Improve business operations