Operating expenses: a guide for UK small businesses

Published Thursday 23 July 2026

Table of contents

• What are operating expenses?
• Operating expenses examples
• Operating expenses vs capital expenditure (OpEx vs CapEx)
• Operating vs non-operating expenses
• Fixed vs variable operating expenses
• How to calculate operating expenses
• The operating expense ratio
• Why operating expenses matter
• How to reduce operating expenses
• Avoid calling expenses overheads
• Manage your operating expenses with Xero
• FAQs on operating expenses

Key takeaways

• Operating expenses are the day-to-day costs you pay to keep your business running, such as rent, wages, and utilities.
• They sit apart from capital expenditure, which covers long-term assets like equipment and vehicles.
• Tracking operating expenses helps you protect profit, claim allowable costs against tax, and understand where your money goes.
• The operating expense ratio compares your costs to revenue, giving you a quick read on how efficiently you run.

What are operating expenses?

Operating expenses are the ongoing costs you pay to run your business each day, separate from the cost of buying long-term assets. They appear on your profit and loss statement and reduce the profit you report before tax.

You’ll often see operating expenses grouped into standard categories on an income statement. Understanding these categories makes it easier to read your accounts and spot where spending builds up. If you’re new to reading financial statements, a plain guide to small business accounting is a good place to start.

On a typical income statement, operating expenses fall into the following categories:

1. Cost of goods sold (COGS), sometimes called cost of sales
2. Selling, general and administrative expenses (SG&A)
3. Depreciation and amortisation
4. Interest
5. Income taxes
6. Miscellaneous costs

Operating expenses examples

Operating expenses cover the practical costs most small businesses recognise from their monthly outgoings. Seeing them written plainly helps you match your own spending to the right category.

Common operating expenses for a UK small business include:

• Rent for premises or workspace
• Business rates paid to your local council
• Utilities such as gas, electricity, and water
• Salaries and wages for your team
• Insurance cover for your business
• Marketing and advertising
• Software subscriptions
• Professional fees for accountants or solicitors
• Travel for business journeys

Operating expenses vs capital expenditure (OpEx vs CapEx)

The difference comes down to timing and purpose: operating expenses (OpEx) are short-term costs you use up within the year, while capital expenditure (CapEx) buys assets that last much longer. You claim OpEx in full against the year you spend it, whereas CapEx is treated differently over time.

Here’s how the two compare in practice:

• OpEx covers recurring running costs, such as rent, wages, and utilities
• CapEx covers one-off purchases of lasting assets, such as machinery, vehicles, or property
• OpEx reduces your profit in the year it’s incurred
• CapEx is spread across the asset’s useful life through depreciation

Keeping the two clearly separated gives you a more accurate view of your operating profit and makes tax time simpler.

Operating vs non-operating expenses

Operating expenses relate directly to running your core business, while non-operating expenses sit outside your main activity. Splitting them out shows how your business performs before one-off or financing costs muddy the picture.

Interest on loans is the classic non-operating expense, since it stems from how you finance the business rather than how you run it. One-off costs also count as non-operating, for example a loss on selling an asset or a legal settlement. Grouping these separately on your profit and loss statement keeps your operating figures clean and comparable year on year.

Fixed vs variable operating expenses

Operating expenses split further into fixed costs that stay steady and variable costs that move with your activity. Knowing which is which helps you plan cash flow and decide where you can cut back.

Fixed operating expenses stay roughly the same whatever your sales, such as rent, insurance, and salaried wages. Variable operating expenses rise and fall with output, such as raw materials, delivery costs, and hourly staff hours. Most businesses carry a mix of both, and understanding the balance makes budgeting far more reliable.

How to calculate operating expenses

You calculate operating expenses by adding up every running cost your business incurs over a set period. The basic formula is operating expenses = COGS + SG&A + depreciation and amortisation.

To work out your total operating expenses, follow these steps:

1. List every running cost for the period, such as rent, wages, utilities, and marketing
2. Add your cost of goods sold to those running costs
3. Include depreciation and amortisation on any assets
4. Total the figures to get your operating expenses

Say your small shop pays £2,000 rent, £5,000 wages, £800 utilities, and £1,200 in stock costs over a month. Adding these gives operating expenses of £9,000 for that month, which you’d then use in your reporting and cash flow planning.

The operating expense ratio

The operating expense ratio (OER) shows what portion of your revenue goes on running costs, so you can judge how efficiently you operate. You calculate it by dividing operating expenses by revenue, then multiplying by 100 to get a percentage.

If your operating expenses are £9,000 and your revenue is £15,000, your OER is 60%. A lower ratio means more of each pound stays as profit, which is why tracking it over time is a useful habit for managing finances and cash flow.

Why operating expenses matter

Operating expenses shape your profit, your tax bill, and how much cash your business keeps. Watching them closely gives you an early warning when costs start eating into your margins.

There are three main reasons operating expenses deserve your attention:

• They represent money leaving your business, so they directly reduce your profit
• Allowable operating costs can be claimed against your taxable profit, lowering the tax you owe
• HMRC expects accurate records of business expenses, so good tracking keeps you compliant

Rising costs are a real pressure right now. According to Xero Small Business Insights, UK small business margins were squeezed by energy and finance costs in the March quarter 2026, with petrol prices up 15%. Keeping a close eye on your operating expenses helps protect your operating profit margin when costs climb.

How to reduce operating expenses

Trimming operating expenses is one of the fastest ways to improve profit without raising prices. A few practical checks each quarter can free up cash you can put back into the business.

To bring your running costs down, try these steps:

1. Review software subscriptions and cancel any you no longer use
2. Renegotiate terms with regular suppliers to secure better rates
3. Automate repetitive admin so you spend less time and money on manual tasks
4. Compare insurance and utility providers before you renew

Avoid calling expenses overheads

It’s tempting to lump every running cost under the label “overheads”, but the two aren’t the same. Overheads are the costs that keep the business open regardless of sales, such as rent and insurance, and they’re only one part of your wider operating expenses.

Using the precise term matters when you report to HMRC, apply for finance, or read your own accounts. Calling everything an overhead can hide costs that behave differently, so stick to operating expenses when you mean the full picture.

Manage your operating expenses with Xero

Tracking every running cost by hand takes time you’d rather spend on the business. When your expenses sit in one place, you can see where your money goes and act before costs creep up.

Xero brings your operating expenses together, helps automate the record keeping, and gives you clear reports so you can stay on top of your numbers. Take control of your costs today and get one month free.

FAQs on operating expenses

Here are answers to some frequently asked questions about operating expenses to round out the detail above.

Is depreciation an operating expense?

Yes, depreciation is an operating expense that spreads the cost of an asset across its useful life. It appears on your income statement even though no cash leaves your account in that period.

Are operating expenses tax deductible in the UK?

Most operating expenses are allowable against your taxable profit if they’re incurred wholly and exclusively for business. You’ll need to keep accurate records to support each claim to HMRC.

Is rent an operating expense?

Yes, rent for your premises or workspace is a standard operating expense. It’s usually a fixed cost that stays the same each month regardless of your sales.

What’s the difference between operating expenses and cost of goods sold?

Cost of goods sold covers the direct costs of producing what you sell, while operating expenses cover the wider running costs of the business. Both reduce your profit, but they’re reported in separate lines on your accounts.