# What is Operating Expense?

## Operating Expense

Operating expenses, often abbreviated as OPEX, are the costs associated with running a business’s day-to-day operations. These are the expenses a company incurs while conducting its normal business operations and are necessary and inevitable for most businesses.

Operating expenses can include:

It’s important to note that operating expenses are different from “cost of goods sold” (COGS). COGS represents the direct costs of producing the goods or services that a company sells and includes things like raw materials and direct labor costs. Operating expenses, on the other hand, are the costs incurred to run the business itself and would still exist even if no production occurred.

Both operating expenses and COGS are subtracted from a company’s revenue to calculate its operating profit or operating earnings. Lower operating expenses can lead to higher operating profit, assuming revenue and COGS stay the same.

## Example of Operating Expense

Let’s provide an example using a hypothetical small business. Let’s say you own a small bookstore called “Book Haven”. Here’s a breakdown of your monthly operating expenses:

• Rent for the bookstore premises: \$3,000
• Utilities (electricity, water, internet): \$500
• Employee salaries: \$5,000
• Marketing expenses (including advertising costs, website maintenance): \$1,000
• Office supplies (stationery, cleaning supplies, etc.): \$200

So, to calculate your total monthly operating expenses, you would simply add all these expenses together:

Operating Expenses = Rent + Utilities + Salaries + Marketing Expenses + Office Supplies + Insurance

Operating Expenses = \$3,000 + \$500 + \$5,000 + \$1,000 + \$200 + \$300

Therefore,

Operating Expenses = \$10,000

This means that Book Haven has \$10,000 in operating expenses every month. This is the cost associated with running the bookstore, excluding the cost of the books themselves (which is covered under the cost of goods sold). If Book Haven’s monthly revenue is greater than \$10,000 plus the cost of goods sold, the bookstore is making a profit. If not, the bookstore is operating at a loss.