Operating expenses (opex)

Published Monday 31 August 2026

Table of contents

• What are operating expenses?
• The 6 categories of operating expenses
• Fixed vs variable operating expenses
• Operating expenses vs capital expenditures
• How to calculate operating expenses
• Why operating expenses matter
• How operating expenses are taxed in the Philippines
• Tips to reduce operating expenses
• Manage operating expenses with Xero
• FAQs on operating expenses
• Related terms
• Learn more about operating expenses

Key takeaways

• Operating expenses (opex) are the day-to-day costs of running your business, and they show up on your profit and loss statement.
• Opex is expensed in the period it is incurred, which is what separates it from capital expenditure on long-term assets.
• Tracking opex closely protects your profit, because every peso you save on running costs stays in the business.
• In the Philippines, ordinary and necessary operating expenses are tax-deductible when they are tied to your business and backed by valid receipts.

What are operating expenses?

Operating expenses, often shortened to opex, are the costs of doing business day to day. They are recorded on your profit and loss statement and subtracted from revenue to work out your profit.

These are the running costs that keep your doors open, from rent and utilities to wages and marketing. Accountants sometimes group them under selling, general and administrative expenses, the costs a business incurs on activities that are not directly tied to making a product or delivering a service (AccountingTools explains operating expenses).

The 6 categories of operating expenses

On the profit and loss statement, operating expenses are commonly grouped into six categories. Knowing where each cost belongs keeps your reporting consistent.

• Cost of goods sold (COGS) or cost of sales: money spent providing your goods or services, such as inventory and freight. Some businesses also include wages, or rent for a dedicated production facility.
• Sales, general and administration (SG&A): costs that are not tied up in the product itself, such as business travel, sales commissions, managers’ salaries, and general admin.
• Depreciation and amortisation: the falling value of assets the business owns. Depreciation covers physical things that wear out, like work tools, while amortisation covers non-physical assets like a patent nearing expiry.
• Interest: only the interest portion of a loan repayment is an expense. The principal is not an operating expense; it is recorded as a finance item.
• Income taxes: taxes applied to business profits are recorded as an expense, though sales tax usually is not, because that money never belonged to the business.
• Miscellaneous: anything that does not fit the categories above.

Some categories, such as depreciation, follow strict rules, while others are more discretionary. One business might record an employee’s wages in COGS while another puts them in SG&A, so the main thing is to set a rule and stay consistent. Many accountants also treat interest and income taxes as non-operating items shown further down the statement, and you can read our full guide to how depreciation works for more on that category.

You will also hear people call some running costs ‘overheads’. Because some treat overheads as fixed costs and others as indirect costs, the term can cause confusion, so it helps to stick to the six categories above and check our explainer on overhead costs if you need the distinction.

Fixed vs variable operating expenses

Operating expenses fall into two behaviours: fixed and variable. Telling them apart helps you predict costs and plan your budget.

• Fixed costs stay roughly the same each month regardless of how much you sell, such as rent, insurance, and salaries.
• Variable costs rise and fall with your sales or production volume, such as raw materials, packaging, and delivery.

Most businesses carry a mix of both. When sales dip, variable costs ease off on their own, while fixed costs keep coming, which is why a clear split makes your forecasting far more reliable.

Operating expenses vs capital expenditures

The other big distinction is between operating expenses and capital expenditures (CapEx). The difference comes down to how long the benefit lasts and how the cost is recorded.

Operating expenses cover short-term running costs and are expensed in the period they are incurred. Capital expenditures are investments in long-term assets, such as vehicles, equipment, or premises, that benefit the business for more than a year. CapEx is recorded on the balance sheet as an asset and written down over time through depreciation, while opex is recorded on the income statement and expensed straight away (U.S. Chamber of Commerce, CapEx vs OpEx vs COGS). Repairing a delivery van is an operating expense; buying the van is a capital expenditure.

How to calculate operating expenses

You calculate total operating expenses by adding up every operating cost for the period. A simple version looks like this:

Operating expenses = rent + utilities + wages + marketing + office supplies + insurance + repairs + depreciation + other running costs.

For example, a Manila café with ₱120,000 rent, ₱90,000 wages, ₱25,000 utilities, and ₱15,000 marketing in a month has ₱250,000 in operating expenses. You can pull these figures straight from a categorised profit and loss statement instead of adding them up by hand.

Why operating expenses matter

Operating expenses shape both your profit and your tax bill, so they reward close attention. Three reasons stand out.

• They reduce your profit: opex is money leaving the business, so the higher it runs, the less profit you keep. Watching it can lift your overall performance.
• They lower your tax: because opex reduces profit, it also reduces the tax you owe, and recording costs correctly means you never pay more tax than you should.
• They attract scrutiny: since expenses affect tax, the Bureau of Internal Revenue takes an interest in how they are reported, so there are rules to follow.

How operating expenses are taxed in the Philippines

In the Philippines, most operating expenses are tax-deductible, but only when they meet the Bureau of Internal Revenue (BIR) tests. Getting this right lowers your taxable income legitimately.

Under Section 34(A)(1)(a) of the National Internal Revenue Code, you can deduct ordinary and necessary expenses that are tied to your trade or business and earned through active operations, such as salaries, rent, utilities, and marketing. The expense must be incurred in the taxable year and backed by valid official receipts or invoices, or the BIR can disallow it (Grant Thornton Philippines on BIR RMC No. 81-2025).

As an alternative to itemising, eligible taxpayers can claim the Optional Standard Deduction of up to 40% of gross sales or receipts in place of listing individual expenses (Revenue Regulations No. 16-2008, Optional Standard Deduction). Keeping accurate records of every cost helps you compare both methods and see our guide to tracking business expenses to stay ready for tax time.

Tips to reduce operating expenses

Trimming operating costs frees up cash without adding sales, though the goal is to cut waste rather than value. A few practical moves help.

• Review recurring costs and cancel subscriptions or services you no longer use
• Renegotiate with suppliers or compare quotes to secure better rates
• Automate repetitive admin so staff time goes to higher-value work

Small, regular reviews add up over a year. Our business cost-saving ideas cover more ways to protect your margins.

Manage operating expenses with Xero

Staying on top of operating expenses is far easier when every cost is captured and categorised automatically. Xero tracks your spending, sorts it into the right categories, and turns it into clear profit and loss reports, so you always know where your money goes. See the difference for your own business and get one month free to start managing your operating expenses with confidence.

FAQs on operating expenses

Here are quick answers to common questions about operating expenses.

Is salary an operating expense?

Yes, salaries and wages for staff who are not directly making a product are operating expenses, and they are often one of the largest. Pay for production workers is usually counted within cost of goods sold instead.

What is the difference between operating and non-operating expenses?

Operating expenses come from your core day-to-day activities, while non-operating expenses sit outside them, such as losses on selling an asset. Separating the two gives a clearer view of how the business itself is performing.

Are operating expenses tax-deductible in the Philippines?

Yes, provided they are ordinary, necessary, tied to your business, and supported by valid receipts under the BIR rules. You can either itemise them or claim the 40% Optional Standard Deduction instead.

What is the operating expense ratio?

The operating expense ratio divides your operating expenses by your net sales to show how much of each sale goes on running costs. A lower ratio generally means the business is running more efficiently.

Related terms

• OpEx vs CapEx
• Capital expenditure
• Overhead
• Fixed cost
• Variable cost
• Expense

Learn more about operating expenses

• Cost of goods sold (COGS)
• Cost of sales: how to calculate it
• How to measure profitability
• Managing cash flow