BAJAJ BROKING
April 03, 2025
7 mins read
Every business, no matter how big or small, has certain expenses that keep it running smoothly. These day-to-day costs are called operating expenses. In simpler terms, Operating expenses (OpEx) are the costs a particular business incurs to maintain its day-to-day operations. They are typically unavoidable. However, the way a company manages them can make or break its profitability. In essence, these expenses are essential for running the business, but do not directly contribute to producing goods or services.
The calculation is simple. If you spend too much, profits shrink. If you spend too little, business growth takes a hit. OpEx typically includes rent, utilities, salaries, office supplies, and marketing expenses. Additionally, unlike capital expenditures (CapEx), which involve long-term investments in assets, operating expenses are recurring. It impacts the company’s short-term financial performance.
In all, managing operating expenses is essential for profitability. This is because excess costs can reduce net income, and well-controlled expenses can improve financial stability and operational efficiency. Understanding operating expenses helps businesses review their budgets, set competitive pricing, and improve overall financial health. That said, let’s take a closer look at what is operating expense, how to calculate them, and strategies to manage them efficiently.
Operating expenses can be broadly categorised as per their nature and function right within a particular business. However, listed below are the few main types:
Fixed Operating Expenses
As the name suggests, these expenses remain constant. Irrespective of the company’s revenue or activity level, fixed OpEx does not change. Furthermore, they are predictable and also necessary for running the business. Some of the examples of fixed OpEx can be insurance premiums, rent, salaries of permanent staff, and depreciation on office equipment.
Variable Operating Expenses
Variable costs fluctuate based on production levels, business activity, or sales. Companies can adjust them more flexibly compared to fixed expenses. Herein, some of the examples include packaging costs, raw materials, sales commissions, and utility bills that usually differ as per usage.
Selling and Marketing Expenses
Next up are the marketing expenses. These are costs incurred to promote and sell a company’s products or services. If businesses can manage these expenses effectively, it can ensure profitability without overspending. Some of the examples include advertising costs, sales team salaries, promotional events, and digital marketing campaigns.
Administrative Expenses
Administrative expenses are related to the overall management of the company instead of a specific department or function. Examples of administrative OpEx include office supplies, professional fees (legal/accounting), software subscriptions, and corporate travel expenses.
Calculating operating expenses is quite easy. Simply put, it involves summing up all costs required to keep a business running. However, note that this excludes the costs related to production, financing, or one-time investments. Here is how it works:
List all day-to-day business expenses. This includes costs like utilities, rent, office supplies, employee salaries, marketing, and administrative expenses.
Next up, remove direct production costs. Expenses directly linked to manufacturing or service delivery, known as the Cost of Goods Sold (COGS), must be excluded here. These costs contribute to the gross profit calculation, not operating expenses.
Next, exclude non-operating expenses. Any costs that are unrelated to core business operations, such as (interest on loans, taxes, or investment losses) are to be deducted.
For example, let's consider a business with the following expenses:
Rent and Utilities: ₹6,00,000
Employee Salaries: ₹15,00,000
Marketing: ₹4,00,000
Office Supplies: ₹2,50,000
Now, because all of these are important for day-to-day activities, these are operating expenses. When you sum it up, the OpEx of this business comes down to ₹27,50,000.
Managing operating expenses is not just about cutting costs but about financial discipline and strategic growth. By tracking and controlling operating expenses, businesses can improve profitability and maintain financial health without compromising efficiency. Here’s a little more on why it is important:
Operational Efficiency and Productivity
Tracking and controlling the operating expenses helps businesses eliminate wasteful spending. This automatically leads to improved workflow and encourages better use of resources. As a result, this leads to better efficiency without compromising on quality.
Long-Term Business Growth
Sustainable cost management makes sure that a business does not just survive but thrives. By keeping expenses under control, companies can easily reinvest in expansion, innovation, and employee growth. Eventually, this will lead to long-term success.
Stronger Cash Flow and Liquidity
Uncontrolled expenses can drain up your cash reserves. When you're in a business, this can make it difficult to pay employees, suppliers, or even reinvest in the business. Hence, keeping expenses in check ensures that you have a steady cash flow, which further reduces financial strain.
Direct Impact on Profits
It is important to note that every rupee saved on operating expenses adds up to the business’s net profit. Even a small reduction in costs can significantly improve profit margins without even needing to increase the revenue.
Better Decision-Making
Understanding operating expenses allows businesses to plan budgets effectively. Furthermore, it helps them evaluate all their spending priorities, and allocate resources where they can get the highest impact.
Strong During Economic Downturns
This is one of the most important aspects. In tough times, businesses with high operating expenses often struggle to stay afloat. However, those with controlled costs can survive slow markets, fluctuating demand, and financial uncertainties with much greater ease.
Let us now take a look at operating and non-operating expenses.
Operating expenses are the costs a business incurs during its normal operations to generate revenue. These include rent, utilities, salaries, marketing, and office supplies. They are essential for day-to-day functioning and are recorded on the income statement. Managing operating expenses efficiently helps maintain profitability.
Non-operating expenses, on the other hand, are costs that are not directly tied to core business operations. These include interest payments on loans, losses from asset sales, and legal settlements. Since they don’t relate to the company’s primary activities, they are reported separately on the income statement.
Understanding the difference helps businesses analyse financial performance more accurately. Reducing unnecessary operating expenses can improve efficiency, while managing non-operating costs can stabilise financial health.
As stated earlier, operating expenses are the recurring costs a business incurs to maintain daily operations. These include salaries, rent, utilities, and office supplies. In simple terms, these are the essential expenses that directly impact profitability in the short term. Since OpEx is fully deducted in the same financial year, businesses often aim to optimise these costs without compromising the efficiency.
On the other hand, capital expenses (CapEx) involve investments in long-term assets such as buildings, machinery, and equipment. Unlike OpEx, CapEx is not immediately deducted from revenue. However, it is capitalised and depreciated over several years. Altogether, these expenses boost business growth and expansion, which further ensures sustainability in the long run.
In a nutshell, while operating expenses keep a business running, capital expenses help it evolve and become better. When done right, balancing the two is key to maintaining financial stability and long-term success in any business.
To understand operating expenses better, let’s take an example of a retail store. A clothing retailer has several day-to-day costs that are essential for running the business. Here are some common examples:
Rent and Utilities
First of, the store needs a physical space to operate. Hence, it pays rent every month. Additionally, expenses like electricity, water, and internet bills are also recurring costs that are required for smooth operations. All of this adds up as an operating expense.
Employee Salaries/Wages
The store has employees. This includes sales staff, cashiers, and managers. The salaries and wages are part of operating expenses. In fact, employee benefits like health insurance and bonuses also fall under this category.
Marketing and Advertising
To attract customers and prospects, the retailer starts spending on marketing and advertising on different platforms and digital media. This may include flyers, social media ads, and promotional campaigns. While these marketing techniques are necessary for business growth, they are considered as an operating expense.
Inventory Costs
The business regularly purchases clothing items from suppliers to stock up for customers. Hence, the cost of acquiring, storing, and maintaining inventory is an essential operating expense.
Equipment and Supplies
Next up, the store requires shelving, cash registers, mannequins, and other fixtures. Regular maintenance and minor repairs of this equipment also count as operating expenses.
Note that the operating costs vary from business to business as per their nature and functioning.
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Operating expenses typically cover all the costs a business incurs to stay up and running. This includes utilities, rent, employee salaries, marketing, office supplies, insurance, and even things like software subscriptions or routine maintenance. In short, if it is a recurring cost that keeps the business moving, it is likely an operating expense.
Operating expenses (OpEx) are the everyday costs of running a business. These are the things you pay for regularly, like wages and utilities. Capital expenses (CapEx), on the other hand, are big-ticket purchases that help a business grow. This involves buying property, machinery, or upgrading any existing technology. The key difference here is that operating expense is deducted in the same year, while capital expense is spread out over time through depreciation.
It is essential to control operating expenses because every rupee spent on operating expenses is a rupee that is not profit. Keeping OpEx under control ensures that a business stays profitable, maintains healthy cash flow, and has enough room to invest in growth. After all, a business that burns too much on daily expenses will struggle to survive long-term, no matter how much revenue it generates.
Absolutely. High operating expenses can eat into profits very fast without you realising it. In case the expenses outweigh the revenue, even a high-earning business can struggle. This is another reason why smart businesses always find ways to cut unnecessary spending, negotiate better deals, or improve efficiency. All of this helps them to keep their profit margins intact.
Cutting operating expenses does not involve reviewing budgets over and over again, but working smarter. Businesses can start streamlining operations with automation. Additionally, they can outsource non-core tasks, negotiate with suppliers, switch to energy-efficient solutions, and cut down on wasteful spending. The goal here is not just to save money but to make sure that every rupee spent adds real value.
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Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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