Operating expenses are the ongoing costs required to run a business, including employee wages, advertising, and depreciation. They are separate from one-time capital expenditures and are tracked throughout the year to provide a clear picture of spending over time. Publicly traded companies and non-profit organizations are required to include information on operating expenses in their annual reports.
Operating expenses is a term frequently used in the corporate world. It refers to the ongoing costs necessary to run a business. In other words, operating expenses are the cost of what happens behind the scenes. This includes costs related to the actual operation of the business.
Sometimes the term operating expenses is abbreviated to OPEX, particularly in internal documents or company earnings communications. The most common operating expense is employee wages and benefits, which is often the largest single expense for a business. Other items that may be included in an expense list are advertising and marketing costs, office supplies, legal and license fees, utility office and bookkeeping fees, research and development costs, and raw materials.
Depreciation, which is the amount of value an asset loses over time, is also considered an operating expense. When the asset, such as a vehicle or equipment, is worth less than the original purchase price, an accountant may subtract the new, lesser value from the initial value and count the remainder as depreciation. This becomes an operating expense as long as the items continue to be used, in some way, in a business’s operations.
One-time business-related costs are generally considered capital expenditures (CAPEX). This includes expenses such as the purchase of new equipment when the old equipment has been fully depreciated. The main reason for separating OPEX and CAPEX costs is that it gives the company, and investors, a more detailed picture of where the money is being spent before it can be turned into profit. If a person is self-employed, they can consider both OPEX and CAPEX to be business expenses.
All publicly traded companies and non-profit organizations are required to include information on operating expenses in their annual reports. Such information is typically illustrated with financial charts that compare operating expenses for the current calendar year with those of prior years. This can help give readers a clear picture of spending over time.
The easiest way to have this information on hand for publishing such reports is to continuously track operating expenses throughout the year, either with the help of an accountant or through the use of financial management software. If expenses vary greatly from year to year, especially if expenses increase, stakeholders will want an explanation. Keeping detailed records can help determine the reasons behind such trends so that an explanation and solution to rising costs can be discovered. Offering such explanations and finding solutions is often the job of the company treasurer.
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