What Are Operating Expenses? Examples, the Formula and Opex vs Capex

That's Xero's definition. On the income statement, Xero shows where they sit: revenue minus cost of goods sold (COGS) gives gross profit, and subtracting operating expenses from gross profit gives operating income. So operating expenses appear after gross profit. If those terms are new, this guide to gross profit and net profit sets them out.

Common examples of operating expenses

Xero's list of common categories:

• Rent
• Salaries and wages, including benefits
• Utilities
• Insurance
• Marketing and advertising
• Office supplies, including software subscriptions
• Professional services such as accountants, lawyers and consultants

Which one is biggest depends on how you sell. In a Xero survey of over 1,000 business owners in the US and Canada, rent was the biggest operating expense for physical businesses, while marketing was the main cost for online businesses, with over 1 in 4 online owners naming it as their largest expense.

Fixed and variable operating expenses

Xero splits opex into two kinds. Fixed operating expenses stay the same each month whatever your volume, such as rent and insurance premiums. Variable ones move with activity, such as marketing spend and supplies.

CFI adds a useful nuance: the same category can be either, depending on the situation. A full-time office employee's wage is a fixed cost, while an assembly-line worker's wage can be variable.

The catch: check where COGS sits first

Here's where sources disagree, and it changes your numbers. Xero and CFI treat operating expenses as the costs below gross profit, with COGS kept separate above it. Shopify's FAQ lists three common categories of operating expenses: selling, general and administrative costs (SG&A), cost of goods sold, and depreciation and amortisation. That puts COGS inside opex.

Neither is wrong as a way of grouping costs, but mixing them is. If one year's figure includes COGS and the next doesn't, your operating expense ratio will jump for no real reason. Pick one definition, write down which, and stick to it.

How to calculate operating expenses

Xero gives two methods. The first is to add up the individual line items. The second is a formula:

Operating expenses = total revenue - operating income - COGS

In Xero's example, as of October 2026, a business has $500,000 of revenue, $200,000 of COGS and $150,000 of operating income. So 500,000 - 150,000 - 200,000 = $150,000 of operating expenses.

Step by step:

1. List every recurring cost of running the business.
2. Remove capital purchases and non-operating costs (see the table below).
3. Decide whether COGS sits inside or outside opex and stay consistent.
4. Add up the line items, or use revenue - operating income - COGS.
5. Divide by revenue to get your operating expense ratio, and track it over time.

A profit and loss statement template makes the line items easier to keep in one place.

Operating expenses vs capital expenditure vs non-operating costs

Xero draws the capex line with two everyday examples. A monthly internet bill is an operating expense. A new delivery van is a capital expenditure: a long-term asset that goes on the balance sheet and is depreciated over its useful life. CFI's version is that buying machinery is capital expenditure, while repairing and maintaining it counts as an operating expense.

Cost	Type	Why
Rent, insurance premiums	Operating, fixed	The same each month whatever your volume
Marketing spend, supplies	Operating, variable	Rise and fall with activity
Delivery van, machinery	Capital expenditure	Depreciated over several years
Repair and maintenance of machinery	Operating	CFI: the repairs are opex, the machine is capex
Loan interest, lawsuit settlements	Non-operating	Reported separately below operating income

Xero says interest payments on loans, losses from selling assets and lawsuit settlements are non-operating expenses. Keeping them separate shows how efficiently the core business runs. CFI also points out that what counts as operational depends on the industry: buying a building is an investment for most firms, but it's operational for a real estate company that buys it to sell on.

How each type is treated for tax is a separate question. If you're self-employed, this guide to allowable expenses for the self-employed covers that side.

Why the operating expense ratio matters

Xero says the lower your operating expenses are relative to revenue, the higher your operating margin. Lenders and investors look at the operating expense ratio, which is opex as a percentage of revenue, and a rising ratio can signal that costs are growing faster than revenue.

CFI adds a limit: opex on its own is an absolute number, not a ratio, so it isn't suitable for comparing firms, even in the same industry. It does work for comparing your own business over time.

Shopify's grocery store example is a reminder that cutting isn't always the answer. Operating costs have to be paid whether the store is open or closed, so you need to budget for holidays and emergencies. Cutting payroll from five staff to four lowers costs but can slow customer service and lose sales, sometimes by more than you saved. The alternative is to raise revenue.

My verdict on operating expenses

Pick one definition, say which one you're using, and track the ratio rather than the raw number. A rising operating expense ratio is your early warning. Before you cut a cost, ask what it does for revenue, because the cheapest-looking saving can be the one that costs you customers.

Frequently asked questions

What are examples of operating expenses?

Rent, salaries and wages, utilities, insurance, marketing and advertising, office supplies including software subscriptions, and professional services such as accountants and lawyers.

Is COGS an operating expense?

It depends on the source. Xero and CFI keep COGS separate, above gross profit. Shopify's FAQ lists it as one of three operating expense categories. Pick one approach and stay consistent.

What is the difference between opex and capex?

Opex is the day-to-day cost of running the business, like a monthly internet bill. Capex is a long-term asset, like a delivery van, that's depreciated over its useful life.

How do you calculate operating expenses?

Add up the individual line items, or use Xero's formula: total revenue minus operating income minus COGS.