Operating expenses (OPEX)

Published Wednesday 12 August 2026

Table of contents

• What are operating expenses (OPEX)?
• Operating expenses vs cost of sales vs capital expenditure
• Types of operating expenses: fixed, variable and semi-variable
• Common examples of operating expenses
• Where operating expenses sit on the income statement
• How to calculate the operating expense ratio
• Why operating expenses matter
• How to reduce operating expenses
• Operating expenses and tax in South Africa
• Take control of 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 that are not directly tied to producing goods or services.
• OPEX is separate from cost of sales (COGS), interest, income tax and capital expenditure (CAPEX), and appears on the income statement below gross profit.
• Understanding your operating expenses helps you control costs, calculate profitability ratios and make informed decisions about where to cut or invest.
• In South Africa, operating expenses incurred in the production of income are generally deductible for income tax purposes.

What are operating expenses (OPEX)?

Operating expenses are the ongoing costs a business incurs to keep running on a daily basis, excluding the direct costs of producing goods or services. Think of them as the money you spend to keep the lights on, staff paid and operations ticking over, regardless of how much you sell.

On the profit and loss statement (also called the income statement), operating expenses sit below gross profit. You may also hear them called overheads. Common examples include rent, salaries, utilities, insurance and marketing costs. Understanding OPEX helps you see how efficiently your business converts revenue into profit.

Operating expenses vs cost of sales vs capital expenditure

Operating expenses are often confused with cost of sales and capital expenditure, but each plays a different role in your finances. Knowing where each sits on your income statement helps you measure profitability accurately.

• Operating expenses (OPEX): ongoing costs to run the business that are not directly tied to producing goods or services, such as rent, salaries and office supplies.
• Cost of sales (COGS): direct costs involved in producing the goods or services you sell, such as raw materials and direct labour. For more detail, see the cost of goods sold guide.
• Capital expenditure (CAPEX): spending on long-term assets like equipment, vehicles or property. CAPEX is not expensed immediately; instead, the cost is depreciated over the asset's useful life.

COGS is deducted from revenue to calculate gross profit. OPEX is then deducted from gross profit to calculate operating profit. CAPEX does not appear as an expense on the income statement directly; it appears on the balance sheet and affects the income statement through depreciation.

Types of operating expenses: fixed, variable and semi-variable

Operating expenses behave differently depending on your sales volume. Understanding these cost behaviours helps with budgeting and forecasting.

• Fixed expenses: costs that stay the same regardless of how much you sell. Example: monthly office rent of R15,000 remains the same whether you make five sales or 50.
• Variable expenses: costs that rise or fall in line with business activity. Example: courier fees increase when you ship more orders.
• Semi-variable expenses: costs with a fixed base and a variable component. Example: a phone plan with a R500 monthly fee plus per-minute charges for calls above the included minutes.

Common examples of operating expenses

Operating expenses cover a wide range of day-to-day running costs. The list below includes items you'll find in most small businesses.

• Rent and property costs
• Salaries and wages (for staff not directly producing goods)
• Utilities (electricity, water, internet)
• Insurance premiums
• Marketing and advertising
• Office supplies and consumables
• Travel and accommodation
• Professional fees (accounting, legal, consulting)
• Depreciation and amortisation

Where operating expenses sit on the income statement

Operating expenses appear in the middle section of the income statement, after gross profit and before operating profit. Their position determines how profitability ratios are calculated.

Revenue minus cost of sales equals gross profit. Gross profit minus operating expenses equals operating profit (sometimes called EBIT, or earnings before interest and tax). Interest and income tax are deducted after operating profit to arrive at net profit. This sequence means operating expenses directly affect operating profit but do not include finance costs or tax.

How to calculate the operating expense ratio

The operating expense ratio tells you what percentage of your revenue goes toward running costs. A lower ratio generally means more efficient operations. Here is the formula:

Operating expense ratio = (operating expenses ÷ revenue) × 100

For example, if your business has R100,000 in annual operating expenses and R550,000 in revenue, the calculation is:

R100,000 ÷ R550,000 × 100 = 18.2%

This means about 18% of every rand earned goes toward operating costs. You can also calculate operating margin, which measures how much operating profit you keep from each rand of revenue:

Operating margin = (operating profit ÷ revenue) × 100

For guidance on interpreting profitability ratios, see the guide to measuring profitability.

Why operating expenses matter

Keeping operating expenses under control is essential for staying profitable and financially healthy. When running costs grow faster than revenue, margins shrink and cash flow tightens.

Rising running costs are the biggest pressure on South African small businesses. The Small Business Growth Index from Absa, SACCI and the Bureau of Market Research found transport, utilities and raw materials were the most volatile inputs in 2025, up by a net 60.9%, 56.9% and 52.9% respectively, with more than half of businesses contracting or at risk of closure.

Tracking OPEX helps you spot trends early, benchmark against industry norms and make informed decisions about where to cut or invest. Strong expense management also supports healthier cash flow. For practical tips, see the guide to managing finances and cash flow.

How to reduce operating expenses

Reducing operating expenses can free up cash for growth or help your business weather difficult trading conditions. In the second-half 2025 Small Business Growth Index, operating costs remained the most acute constraint on the sector, with the composite confidence score in the "vulnerable" band at 51.5 points. A structured review of your overheads can reveal savings without cutting essentials.

• Review discretionary spending and pause non-essential subscriptions or services.
• Renegotiate contracts with suppliers, landlords and service providers.
• Automate repetitive admin tasks to reduce labour costs.
• Go paperless and switch to energy-efficient lighting and appliances.
• Reconsider office space: remote or hybrid work may lower rent and utility bills.
• Audit software subscriptions and cancel duplicates or underused tools.

For more ideas, see the business cost-saving ideas guide.

Operating expenses and tax in South Africa

Operating expenses incurred in the production of income and not of a capital nature are generally deductible for income tax purposes in South Africa. This means expenses like rent, salaries and professional fees may reduce your taxable income, though not every expense qualifies.

For VAT-registered businesses, the VAT charged on business expenses is generally claimable as input VAT. South Africa's standard VAT rate is 15%. Because you can claim input VAT back, the VAT portion of an expense is typically not an operating cost itself. If you hear OPEX referred to as overheads, the terms are used interchangeably.

Always consult a tax professional to confirm which expenses are deductible in your specific circumstances.

Take control of your operating expenses with Xero

Tracking every rand you spend on running costs becomes easier when your accounting is organised in one place. Xero connects to your bank, categorises transactions automatically and generates real-time reports so you can see exactly where your money goes. Ready to simplify your finances? Get one month free and start managing your operating expenses with confidence.

FAQs on operating expenses

Below are answers to common questions about operating expenses in a South African context.

What is included in operating expenses?

Operating expenses include rent, salaries, utilities, insurance, marketing, office supplies, travel and professional fees. They do not include cost of sales, interest, income tax or capital expenditure.

What is the difference between operating expenses and cost of sales?

Cost of sales covers direct costs of producing goods or services, such as raw materials. Operating expenses cover indirect running costs like rent and admin salaries that are not tied to production volume.

Are salaries an operating expense?

Salaries for administrative, sales and support staff are operating expenses. However, wages for workers directly involved in producing goods or services form part of cost of sales.

What is the difference between operating expenses and capital expenditure?

Operating expenses are consumed within the financial year, while capital expenditure is spending on long-term assets (like machinery or vehicles) that benefit the business over several years. CAPEX is depreciated rather than expensed in one go.

Are operating expenses tax-deductible in South Africa?

Operating expenses incurred in the production of income and not of a capital nature are generally deductible. Some expenses have specific limits or exclusions, so check with a tax professional for your situation.

Related terms

• Expense
• Profit and loss statement
• Cash flow
• Income tax

Learn more about operating expenses

• How to increase profits
• Profitability ratios
• Cash flow management for small businesses
• Operations management