Calculating your operating expenses is all about adding up the costs of keeping your business running day-to-day, separate from what it costs to actually make your product. The formula itself is simple: Operating Expenses = Cost of Goods Sold (COGS) + Selling, General, & Administrative (SG&A) Expenses. Getting this number right gives you a real, honest look at how efficiently your business is operating.

Getting a Handle on Your Business's Core Costs

Figuring out your operating expenses—often just called OPEX—is one of the most fundamental things you can do for your business's financial health. These are the costs you pay just to keep the lights on and the doors open. Think of OPEX as the fuel for your business engine; it covers everything from your office rent and utility bills to the salaries for your marketing and admin teams.

When you calculate this number accurately, you can start making smarter decisions about your pricing, budgeting, and overall business strategy. Tracking OPEX closely helps you spot where money is being wasted, tighten up your spending, and ultimately boost your profit margins. It's also one of the first things lenders and investors look at to see if you're running a tight ship.

Knowing Which Expenses Count (And Which Don't)

Before you can add anything up, you have to get good at separating your operating expenses from everything else. This is where a lot of business owners get tripped up. Things like interest payments on a loan or one-time losses from an old investment are considered non-operating expenses—they aren't part of your core, daily business activities, so they don't belong in your OPEX calculation.

Key Takeaway: By clearly defining and categorizing your expenses, you create a reliable financial snapshot. This clarity is essential for everything from tax preparation to applying for a small business loan.

To make this a little easier, I've put together a quick reference table. Think of it as a cheat sheet to help you start sorting your costs before we jump into the actual calculation.

Operating Expenses vs. Non-Operating Expenses At a Glance

Expense Category	Is it an Operating Expense?	Example
Office Rent	Yes	Monthly payment for your workspace.
Employee Salaries	Yes	Wages for marketing and admin staff.
Utility Bills	Yes	Electricity, water, and internet services.
Equipment Purchase	No (Capital Expense)	Buying a new delivery truck.
Loan Interest	No (Non-Operating)	Interest paid on a business loan.
Marketing Costs	Yes	Advertising campaigns and software.

Nailing this categorization is the bedrock of an accurate OPEX figure. It ensures you aren't mixing up the daily cost of doing business with long-term investments or financing activities, which keeps your financial reports clean, accurate, and truly useful for planning your next move.

Where to Find the Numbers for Your Calculation

Before you can calculate your operating expenses, you need to know where to find the right numbers. An OPEX calculation is only as good as the data you feed it, so think of this as a bit of a financial scavenger hunt. Your goal is to pull together all the figures that represent the day-to-day costs of keeping your business running.

The first step is to decide on a timeframe. Are you looking at your costs for the last month, the last quarter, or the entire year? Whatever you choose, stick with it. Consistency is what allows you to compare apples to apples later on and spot trends in your spending.

Digging Into Your Financial Data Sources

Your business's financial data is likely scattered across a few different places. It's a rookie mistake to rely on just one source. You need to cross-reference your documents to make sure you're getting a complete and accurate picture of your expenses.

Here’s where you should be looking:

• Your Income Statement (P&L): This is ground zero. Your P&L statement is designed to list your revenues and expenses, often neatly categorized, giving you a direct summary of your operational costs.
• Accounting Software: If you use a platform like QuickBooks or Xero, you're in luck. This software is a goldmine of real-time financial data and can spit out detailed expense reports with just a few clicks.
• Bank and Credit Card Statements: Don't skip these. Combing through your statements line by line is the best way to catch those small, recurring costs—like software subscriptions or office supplies—that are easy to forget.
• Payroll Records: This is where you'll find the hard numbers on salaries, wages, employee benefits, and payroll taxes. Remember to account for specific obligations like understanding payroll tax, as these can be a major operating expense and vary depending on where you're located.

Getting these documents in order is half the battle. If you need a refresher, our guide on how to prepare financial statements is a great resource for getting organized.

A Quick Checklist for Common Operating Expenses

To make sure nothing gets missed, it helps to work from a checklist. While every business is different, most operating expenses fall into a handful of common categories. Use this list to guide your search.

Selling, General & Administrative (SG&A) Expenses:

• Rent or Lease Payments: For your office, storefront, or warehouse.
• Utilities: Your bills for electricity, water, gas, and internet.
• Salaries and Wages: For your non-production team (think admin, sales, and marketing).
• Marketing and Advertising: Costs for social media ads, campaigns, and promotional materials.
• Office Supplies: The daily essentials like paper, ink, and pens.
• Software Subscriptions: All those monthly fees for your CRM, project management tools, or accounting platform.
• Insurance: General liability, property, and workers' comp policies.
• Professional Fees: What you pay your lawyer, accountant, or consultants.
• Repairs and Maintenance: The cost to fix office equipment or maintain your building.

Cost of Goods Sold (COGS):

• Raw Materials: The actual stuff you use to make your product.
• Direct Labor: Wages for the employees who are hands-on in production.
• Manufacturing Overhead: Think factory rent or the utilities for your production facility.

This isn't just an internal bookkeeping exercise; these numbers tell the story of your business's health. Take the U.S. airline industry, for example. In a recent second quarter, their total operating expenses hit $60.7 billion. Of that, $22.9 billion went to labor costs alone, with fuel costs making up another huge chunk. It’s a perfect illustration of how OPEX paints a picture of an entire industry. You can see the full analysis of how operating expenses impact major industries on gbta.org.

Pro Tip: As you gather these figures, plug them into a simple spreadsheet. Create columns for the expense name, the amount, the date, and its category. This simple habit will make the final calculation a breeze and gives you an invaluable record for the future.

By taking the time to gather and organize this information systematically, you're doing more than just prepping for a calculation. You're building the foundation for a clear, accurate financial analysis that will empower you to make much smarter decisions for your business.

Separating Operating Expenses from Capital Investments

One of the trickiest parts of calculating operating expenses is knowing where to draw the line between your day-to-day costs and major, long-term investments. It’s a common mistake to mix them up, and doing so can seriously throw off your financial reports. Getting this right isn't just about tidy bookkeeping—it has a direct impact on your taxes and how you measure profitability.

At its core, the difference is pretty straightforward. Operating Expenses (OPEX) are the costs that keep the lights on and the doors open every day—things like rent, salaries, and utility bills. These are costs you use up within the year.

On the other hand, Capital Expenditures (CapEx) are significant purchases of assets that will bring value to your business for more than one year.

What Makes an Expense a Capital Investment

I like to think of it this way: OPEX is the fuel for the engine, while CapEx is buying a whole new, more powerful engine. A capital investment is a big purchase you make to grow your business or make it better at what it does.

Here are a few telltale signs that you're looking at a capital expenditure:

• It has a useful life of over one year. A new delivery truck, a commercial oven for your bakery, or a suite of powerful computers all fall into this category.
• It improves or enhances an existing asset. Let's say you do a major engine overhaul on that delivery truck that extends its life by five years. That’s not just maintenance; it's a capital improvement.
• It's a significant financial outlay. While there isn't a magic dollar amount, CapEx is typically a substantial purchase that sits outside your normal monthly budget.

For instance, if a landscaping company buys a brand-new $50,000 commercial mower, that’s a capital investment. But the $200 they spend on gas and oil for it each month? That’s an operating expense. To keep these categories straight, solid asset and inventory management practices are a must.

Navigating the Gray Areas with a Real-World Scenario

Sometimes, the line between OPEX and CapEx can feel a bit blurry. Let's walk through a common situation for a trades business, like an electrical contractor.

Imagine their main work van, bought four years ago, suddenly breaks down. They're looking at two different paths forward:

1. Option A: Spend $1,500 on repairs just to get it back on the road. This is a classic operating expense. It's routine maintenance that brings the van back to its previous working condition.
2. Option B: Spend $9,000 to replace the entire engine and transmission with a brand-new, more efficient system. This adds significant value and extends the van's useful life by several more years. This is a capital expenditure.

The key question to ask is this: Did the expense merely restore the asset to its previous condition, or did it significantly improve or extend the life of the asset? Restoring is OPEX; improving is CapEx.

This diagram shows a simple way to think about where to find and sort the data for your expense calculations.

As you can see, your primary financial documents—bank statements, payroll records, and bills—are the sources you'll use to identify and classify all your business costs.

Why This Distinction Matters for Your Business Strategy

Getting the OPEX vs. CapEx separation right has huge implications for your business. Operating expenses can be fully deducted from your revenue in the year you spend the money, which directly lowers your taxable income.

Capital expenditures are handled differently. They are capitalized, which means the cost is spread out over the asset's useful life through a process called depreciation.

This is also a critical factor when you're deciding how to acquire new equipment. Understanding the financial treatment of a large purchase can shape your entire strategy. For a much deeper look at this, our guide on leasing vs. buying equipment can help you figure out the best move for your company's financial health.

Ultimately, mastering this separation ensures your financial statements are accurate. That accuracy is exactly what lenders, investors, and you yourself will rely on to gauge the true operational efficiency and profitability of your business.

Using a Spreadsheet to Get a Handle on Your OPEX

Alright, you’ve done the hard work of gathering your financial records and figuring out which costs are daily operating expenses versus long-term capital investments. Now it's time to put it all together. A simple spreadsheet is your best friend here—it'll take that messy list of numbers and turn it into a single, clear figure that shows exactly what it costs to keep your business running.

This isn't just a math exercise. Think of this as creating a living document that gives you real control over the financial health of your business. Let's walk through how to build and use one to calculate your operating expenses accurately.

Setting Up Your OPEX Calculation Spreadsheet

The whole point of this spreadsheet is to bring our core formula to life: Operating Expenses = Cost of Goods Sold (COGS) + Selling, General, & Administrative (SG&A) Expenses. So, your sheet should be structured to mirror this logic.

Start by creating three main sections:

1. Cost of Goods Sold (COGS): This is for the direct costs tied to what you sell.
2. Selling, General, & Administrative (SG&A) Expenses: This is where you'll list out all the other day-to-day costs.
3. Final OPEX Calculation: A simple summary at the top or bottom that adds the first two sections together.

Organizing it this way makes your expenses easy to read and understand. Not only does it help you avoid mistakes, but it also makes it much easier to see where your money is actually going. This simple setup is also the foundation for more advanced financial planning, which we cover in our guide on how to create a business budget.

Here’s a look at what a basic template might look like, with categories already laid out for both COGS and SG&A expenses.

As you can see, grouping your expenses logically makes it incredibly straightforward to plug in your numbers and see how everything adds up to your total OPEX.

Plugging in Your Real Numbers

With your template ready, it's time to populate it with the actual figures you pulled from your financial records for your chosen timeframe, whether that's last month or the last quarter. Accuracy is everything here.

First, let's tackle your Cost of Goods Sold. If you own a retail shop, this would be the cost of the inventory you sold. For a tradesperson, it's the cost of materials and the direct labor you paid for jobs completed during that period. Drop that total into the COGS section of your sheet.

Next up: SG&A expenses. This is where that detailed checklist you made earlier comes into play. Go line by line and plug in the amounts for each category:

• Rent/Lease Payments: Your monthly cost for the office, shop, or warehouse.
• Salaries & Wages: For your admin, sales, and marketing folks (not the direct labor in COGS).
• Utilities: The combined total for electricity, water, internet, and phone.
• Marketing & Advertising: Everything you spent on ads, social media campaigns, and promotional materials.
• Office Supplies: The little things that add up—paper, ink, pens, etc.
• Software & Subscriptions: All those recurring monthly or annual software fees.
• Insurance: Premiums for your general liability, property, or other business policies.
• Professional Fees: What you paid your accountant, lawyer, or consultants.

This kind of detailed tracking is what separates businesses that are guessing from those that are in control. On a massive scale, these numbers provide crucial economic insights. For example, in a recent third quarter, US investment-grade companies reported a staggering $3.052 trillion in total operating expenses, which was an increase of over $73 billion from the quarter before.

Calculating the Final OPEX Figure

Once every expense has found its home in your spreadsheet, the last step is the easiest.

Use a simple SUM formula in your spreadsheet to get a total for all the line items in your SG&A section.

Pro Tip: Don't just add the numbers up manually. Set up your spreadsheet with a formula that automatically adds your total COGS to your total SG&A. This way, your final operating expense figure updates in real-time as you tweak your numbers.

The formula in your final calculation cell will look something like this: = [cell with COGS total] + [cell with SG&A total].

That final number is your total operating expense for the period. It’s a powerful metric that represents the true cost of keeping the lights on. With this figure, you’re no longer flying blind—you're equipped to analyze your spending, find opportunities to save, and make the smart, strategic decisions that grow your bottom line.

Putting Your OPEX Analysis to Work

Getting a handle on your total operating expense is a huge step, but it’s really just the starting point. The real magic happens when you turn that number into a tool for making smarter, more profitable decisions. Think of your OPEX calculation not just as an accounting task, but as a lens that brings your business's financial health into sharp focus.

Once you have a reliable OPEX figure, you can shift from passively tracking costs to actively managing them. This is where you find the hidden fat to trim, uncover opportunities to be more efficient, and ultimately, fatten up your bottom line.

Introducing the Operating Expense Ratio

To make that raw OPEX number truly meaningful, you need to give it some context. The best way to do that is with the Operating Expense Ratio (OER). This simple metric is incredibly powerful, showing you exactly what percentage of your revenue is being eaten up by the cost of keeping the lights on.

The formula couldn't be simpler:

Operating Expense Ratio (OER) = Total Operating Expenses / Total Revenue

Let's put it into practice. Imagine your retail shop brought in $100,000 in revenue last quarter and your total OPEX was $60,000. Your OER would be 60% ($60,000 / $100,000).

That tells you something crucial: for every single dollar you earned, 60 cents went right back out the door to cover operational costs. Now that’s a number you can work with.

Using Your OER to Spot Trouble Before It Starts

This isn't a one-and-done calculation. The real value comes from tracking your OER consistently—every month or quarter. Doing so helps you spot trends and catch problems early. A stable or shrinking ratio is a fantastic sign that you're keeping costs in check as you grow. A rising ratio, on the other hand, is a flashing red light that needs your immediate attention.

Here are a couple of all-too-common scenarios I’ve seen play out:

• The Sudden Spike: You’re reviewing the books and notice your OER jumped from 55% to 62% last month. That’s a big move. You dig into the numbers and find that your utility bills went through the roof. This prompts you to check for a water leak or an inefficient HVAC unit that needs servicing—a costly problem you might have missed for months otherwise.

• The Slow Creep: Maybe your marketing spend has been inching up over the last six months, pushing your OER up a few percentage points. It’s not a huge jump, but it’s a trend. This forces you to ask the hard questions about your ad campaigns. Are they still delivering a solid return, or has a "set it and forget it" mindset started to quietly drain your profits?

Operating expenses are the sum of all the costs of running the business day-to-day. For example, if a company has total operating expenses of $500,000 on $1 million in revenue, its OER is 50%. This ratio is a core indicator of a company's efficiency, and figures like these are used to build a bigger picture of economic health, which you can see in reports like those from the Bureau of Economic Analysis at bea.gov.

How Do You Stack Up? Benchmarking for a Competitive Edge

Your OER isn't just an internal report card; it's also a powerful tool for measuring yourself against the competition. Every industry has a different "normal" when it comes to operating costs. A lean software company will naturally have a very different OER than a restaurant that has to constantly buy food and pay a large staff.

So, where do you find these numbers? Check with your industry's trade association, look at reports from business analytics firms, or even talk to a mentor at your local Small Business Development Center.

Let's say you run a landscaping business and discover your OER is holding steady at 75%. But after a little research, you find the industry average is closer to 65%. That 10% gap is a massive wake-up call. It tells you that your competitors are running a tighter ship, which should immediately push you to scrutinize your own costs. Are you spending too much on fuel? Is your equipment maintenance schedule costing you more in downtime? Can you optimize crew scheduling?

Finding and closing that gap isn't just about saving money—it's about making your business more resilient, competitive, and attractive to lenders when it's time to grow.

A Few Lingering Questions About Operating Expenses

Even after you've crunched the numbers, a few questions always seem to pop up. Don't worry, that's normal. Getting a handle on operating expenses can feel a little tricky at first, but once you clear up these common points, you'll feel much more confident in how you manage your business finances.

Getting these details right isn’t just about bookkeeping; it’s about making sure your financial reports are accurate. That accuracy is what lets you make smart, strategic decisions for your company’s future. Let's dig into the questions I hear most often from business owners.

Are Employee Salaries an Operating Expense?

Yes, almost always. For most businesses, employee salaries are a core operating expense, falling squarely into the Selling, General, & Administrative (SG&A) bucket. This isn’t just about the base pay or hourly wages, either. It includes all the related costs like payroll taxes, health insurance premiums, and other employee benefits.

Think of it this way: these are the costs of keeping the lights on and the business running, regardless of how many sales you made that particular month.

But there is one major exception to know:

• Direct Labor: If you have employees who are physically making your product—say, someone working on an assembly line—their wages usually get classified under Cost of Goods Sold (COGS) instead of SG&A.

For the vast majority of businesses, especially if you're in a service industry, you can safely count nearly all of your payroll costs as operating expenses.

How Often Should I Be Calculating My Operating Expenses?

You need to be calculating your operating expenses at least once a month. Anything less frequent, and you're flying blind. This is what turns financial tracking from a backward-looking chore into a proactive tool for running your business.

Of course, you’ll still need quarterly and annual numbers for tax filings and formal financial reports. But a monthly check-in gives you the real-time insights you need to actually manage your business day-to-day.

Calculating OPEX monthly lets you spot spending trends as they happen, catch surprise cost increases before they spiral out of control, and make quick, smart tweaks to your budget. It’s all about staying in control of your cash flow and profitability.

Waiting a full quarter to review your expenses is like waiting three months to check the fuel gauge on a cross-country road trip. You could be heading for trouble long before you even realize it.

What's the Difference Between Fixed and Variable Operating Expenses?

This is a crucial distinction for anyone trying to build a solid budget or financial forecast. Understanding the difference helps you predict how your total expenses will change as your sales go up or down.

Here’s a simple way to think about it:

Expense Type	The Bottom Line	Real-World Examples
Fixed Expenses	These costs stay the same month after month, no matter how busy you are.	Rent or mortgage payments, insurance, salaries for your core team, software subscriptions.
Variable Expenses	These costs go up and down directly with your level of business activity or production.	Sales commissions, shipping and packaging costs, raw materials (a COGS item), hourly wages for production help.

For instance, your $3,000 monthly rent is a fixed cost—you owe it whether you make one sale or a thousand. On the flip side, the extra $5,000 you spent on shipping during a record sales month is a variable cost. Knowing which is which allows you to build a much more flexible and realistic budget.

Can I Just Use Accounting Software to Automate This?

Absolutely. In fact, you should! Using modern accounting software is the single most efficient way to track and calculate your operating expenses. Platforms like QuickBooks, Xero, or FreshBooks are built to do exactly this, saving you countless hours and dramatically reducing the chance of human error.

The secret to making automation work, though, is having a clean and well-organized chart of accounts.

This means you have to be disciplined from day one about categorizing every single transaction correctly. When you pay a bill, tag it as "Rent," "Utilities," or "Marketing Spend." When you process payroll, make sure it’s assigned to the right account. If you do this consistently, the software can spit out a perfect income statement (or P&L) that sums up your total operating expenses for any period—monthly, quarterly, or annually—with just a couple of clicks.

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