What Is Operating Expense?
An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research and development. One of the typical responsibilities that management must contend with is determining how to reduce operating expenses without significantly affecting a firm's ability to compete with its competitors.
Operating expenses are necessary and unavoidable for most businesses. Some firms successfully reduce operating expenses to gain a competitive advantage and increase earnings. However, reducing operating expenses can also compromise the integrity and quality of operations. Finding the right balance can be difficult but can yield significant rewards.
Abbreviated as CAPEX, capital expenses are purchases a business makes as an investment. Capital expenditures include costs related to acquiring or upgrading tangible and intangible assets. Tangible business assets include real estate, factory equipment, computers, office furniture, and other physical capital assets.
Intangible assets include intellectual property, copyrights, patents, trademarks, etc
Operating expenses are incurred in the regular operations of business and include rent, equipment, inventory costs, marketing, payroll, insurance, and funds allocated for research and development. Operating expenses are necessary and mandatory for most businesses.
Operating Expenses on Income Statements
An income statement tracks the income and expenses of a company over a certain period to provide an image of its profitability. Income statements typically categorize expenses into six groups: cost of goods sold; selling, general, and administrative costs; depreciation and amortization; other operating expenses; interest expenses; and income taxes. All these expenses can be considered operating expenses, but when determining operating income using an income statement, interest expenses and income taxes are excluded.