operating expenses
The costs incurred in normal business operations excluding COGS, including rent, utilities, salaries, marketing, and administrative expenses.
Example
“After subtracting COGS and $3M in operating expenses from $10M revenue, operating income was $1M.”
Memory Tip
OPERATING EXPENSES = the cost of running the business beyond making the product. Rent, salaries, marketing.
Why It Matters
Understanding operating expenses helps you evaluate a business's true profitability and efficiency. For personal finance, recognizing these costs when running a side business or freelance operation ensures you price your services correctly and know your actual profit margins.
Common Misconception
Many people think operating expenses are the same as total business costs, but they specifically exclude cost of goods sold (COGS). This means the raw materials or inventory used to create products are tracked separately, which is crucial for calculating gross profit accurately.
In Practice
A small coffee shop with monthly revenue of $15,000 might have COGS of $4,500 for coffee beans and supplies. Their operating expenses could include $3,000 rent, $1,200 staff salaries, $300 utilities, and $400 marketing, totaling $4,900, leaving a gross profit of $10,500 minus operating expenses of $4,900 for a net operating profit of $5,600.
Etymology
OPERATING (day-to-day business) EXPENSES (costs). Costs to OPERATE the business daily.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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