Finance term
Operating Expenses (OPEX)
Also known as: OPEX, operating expenses, SG&A, overhead
Definition
Operating expenses (OPEX) are the ongoing costs of running a business that aren't part of COGS — rent, utilities, marketing, non-production salaries, insurance, and administrative costs. OPEX is subtracted from gross profit to produce operating income (EBIT).
Detailed explanation
OPEX sits on the income statement between gross profit and operating income (EBIT). It captures everything it costs to run the business beyond directly producing what you sell: rent, utilities, insurance, salaries for management and administrative staff, marketing and advertising, office supplies, software subscriptions, professional fees (legal, accounting), and R&D.
A common shorthand is SG&A (selling, general, and administrative expenses) — which is effectively OPEX broken into its selling-expense and G&A components. Some income statements also break out R&D separately from SG&A, particularly in tech-heavy businesses.
Managing OPEX is central to improving operating margins. Revenue growth with controlled OPEX produces operating leverage — each incremental dollar of revenue flows through at a higher margin because fixed OPEX doesn't scale with revenue. Businesses with high fixed OPEX (large lease obligations, big salary bases) carry more operating risk in downturns; businesses with variable OPEX (commission-based sales forces, flexible staffing) are more resilient when revenue drops. Lenders analyzing an income statement distinguish between 'core' recurring OPEX and one-time items — normalizing EBITDA accordingly.
◈ Worked example
- Retail clothing store OPEX: $8K/mo rent + $3K utilities + $5K marketing + $4K admin salaries + $2K insurance = $22K/mo OPEX on top of COGS.
- SaaS company OPEX: $200K R&D salaries + $150K sales and marketing + $80K G&A. Revenue = $1M. OPEX ratio = 43%. If gross margin = 85%, operating margin = 85% - 43% = 42%.
- Restaurant trying to improve margins cuts OPEX (switches to cheaper POS software, renegotiates delivery contracts) without touching COGS — preserving food quality while improving operating income.
Common questions
The most-asked questions about Operating Expenses (OPEX) — answered straightforwardly.
Is rent COGS or OPEX? +
Usually OPEX — but it depends on whether the space is directly tied to production. A restaurant's kitchen rent is COGS (direct production). The same restaurant's dining room and office space is OPEX. A manufacturer's factory rent is typically COGS (overhead absorbed into product cost); the corporate headquarters is OPEX. The allocation rule: if the expense is necessary to produce the product/service, it's COGS; if it's needed to run the business generally, it's OPEX.
What is operating leverage? +
Operating leverage describes how a business's operating income changes with revenue changes. High fixed OPEX (leverage) means revenue increases flow almost entirely to operating income — good in growth, bad in decline. Low fixed OPEX (or more variable costs) means margins are more stable across revenue cycles. A business with 80% gross margin and $500K fixed OPEX breaks even at $625K revenue — below that, operating losses; above it, rapid profit scaling.
How is OPEX different from CAPEX? +
OPEX is expensed in the period incurred — it flows through the income statement immediately. CAPEX (capital expenditures) is capitalized — the cost is spread over the useful life of the asset through depreciation. Buying a $50K machine is CAPEX (then $10K/yr depreciation for 5 years hits OPEX as depreciation expense). Renting the same machine for $10K/yr is OPEX. The distinction affects both taxes and financial ratios.
Further reading
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