How to Calculate Operating Expenses for Your Business

To figure out your operating expenses, you just add up all the costs of running your business day-to-day. This doesn't include the costs of actually making your product or service. So, you'll count things like salaries for your office team, rent, electricity, and marketing software.

Think of it as the price of keeping the lights on.

What Are Operating Expenses Anyway?

Let's skip the confusing accounting terms. Operating expenses, or OPEX, are just the costs your business has to pay to stay open, separate from the cost of what you sell. Understanding these numbers is the first step to knowing if your business is actually making money.

If you don't know your OPEX, you're guessing about your business's health. It's a common mistake I see—hidden costs eat up profits before a business owner even knows what’s going on.

Why OPEX Matters More Than You Think

It’s easy to focus only on sales, but ignoring your operating costs is a big mistake. These expenses eat up a huge slice of the money you make.

For many service businesses, operating costs can be 60% to 80% of their total revenue. That doesn't leave much room for profit.

This means even a small increase in your costs can cause a big problem. A business with $2 million in yearly expenses could find itself paying an extra $222,000 a year if it isn't watching its OPEX.

Imagine a local construction company. The office manager’s salary and truck insurance are operating expenses. But the wood and nails for a job? That's a direct cost of building, so it's not an operating expense.

Getting Your Numbers Organized

Before you add anything up, you need a way to track where your money goes. This is where your financial records come in. Every single expense needs to be put into a category.

This organized list of categories is what accountants call a chart of accounts. It’s a basic tool for any business owner who wants to calculate operating expenses correctly and make smart financial choices.

So, what kinds of things are operating expenses? Here are some common examples:

• Office costs: Things like rent, electricity, internet, and supplies.
• Employee pay: The salaries for your office staff, sales team, and managers—anyone not directly making your product.
• Sales and marketing: Ads, subscriptions for marketing tools, and sales team commissions.
• Insurance and fees: Business insurance, permits, and any fees you have to pay to operate legally.

Finding the Right Numbers for Your Calculation

Before you can add up your costs, you need to know which numbers to use and where to find them. The best place to look is your income statement, which is sometimes called a profit and loss (P&L) statement.

This report lists all the money your business earned and spent over a certain time, like a month or a year. The key is to pick out only the operating costs and leave everything else out.

If you aren't sure where to find your numbers, our guide on how to track business expenses is a great place to begin. Getting organized first will make this whole process much easier.

What Counts as an Operating Expense?

Let’s be specific. Operating expenses are the everyday costs of running your business. These are the bills you pay just to keep the lights on and your team working, no matter how many sales you make.

Here are the common costs you'll find listed under OPEX:

• Rent or lease payments for your office or store.
• Utilities like electricity, water, gas, and internet.
• Salaries and benefits for your office, sales, and management staff (but not the people who make your product).
• Marketing and advertising costs, like online ads.
• Office supplies, like printer paper and coffee.
• Software subscriptions for tools like your accounting software or project management apps.
• Insurance costs, such as liability or property insurance.
• Professional fees you pay to a lawyer or accountant.

It's also easy to forget small costs that add up, like credit card processing fees. For a closer look at those, check out a comprehensive guide to merchant payment processing and costs.

Important Takeaway: The goal is to count every cost that helps your business run day-to-day but isn't part of making the product you sell.

What Stays Out of the Calculation?

Knowing what not to include is just as important. If you add the wrong numbers, you'll get a false idea of how your business is doing.

The two biggest things to leave out are:

1. Cost of Goods Sold (COGS): These are the direct costs of making what you sell. If you own a coffee shop, COGS is the cost of the coffee beans and milk. For a roofer, it’s the shingles and nails.
2. Non-Operating Costs: This includes things like income taxes, interest you pay on loans, and big, one-time costs like buying a building or expensive equipment.

To make it easier, here's a quick table.

Operating Expenses What to Include vs Exclude

Getting this right is key to seeing how well your business is running.

One of the biggest operating expenses is always labor. Reports show that paying your team often makes up 50% to 70% of a company's total operating budget.

For a small business in Philadelphia with $3 million in yearly OPEX, that could mean $1.77 million goes to paying its people. You can find more details in this 2025 operating budget report.

The Simple Formula for Operating Expenses

Figuring out your operating expenses isn't as scary as it sounds. You don't need a complicated spreadsheet or an accounting degree. It's really just simple addition.

Here’s the basic formula:

OPEX = Payroll + Rent + Utilities + Marketing + All Other Day-to-Day Costs

That’s it. You’re just grabbing all those everyday costs we talked about and adding them together. You're counting every dollar your business spends to keep the doors open—everything that isn't a direct part of the product or service you sell.

Putting the Formula Into Action

Let's use a real-world example. Say you run a small IT company. To find your monthly OPEX, you'd pull the numbers from your financial records. You'll usually find these costs on your profit and loss statement.

Here’s what your list of monthly operating costs might look like:

• Salaries & Benefits: $20,000 for your project manager, office assistant, and sales rep.
• Office Rent: $5,000 for your workspace.
• Utilities: $1,000 for internet, electricity, and water.
• Software Subscriptions: $500 for your CRM, project management tool, and accounting software.
• Marketing & Ads: $1,500 for your online ads.
• Insurance: $300 for business insurance.
• Office Supplies: $200 for coffee, paper, and other things.

Now, you just add them all up.

$20,000 + $5,000 + $1,000 + $500 + $1,500 + $300 + $200 = $28,500

In this case, your total monthly operating expense is $28,500. This one number gives you a clear idea of what it costs to keep your business open for one month.

This simple math is your first step to understanding your business’s financial health. It helps you stop guessing about your spending and start knowing exactly how much it costs to run your company.

How to Use Your OPEX Number to Grow

Okay, so you’ve done the work and now you have a single number for your total operating expenses. That’s a big step, but that number by itself doesn't tell you the whole story.

It’s like knowing your car's top speed but not knowing its gas mileage. To make your OPEX number useful, you need to compare it to something. This is where a simple tool called the Operating Expense Ratio (OER) comes in handy.

The OER just shows what percentage of your income is used up by your day-to-day costs. Knowing this ratio is the fastest way to see how well your company is running.

Calculating Your Operating Expense Ratio

The math for this is simple. All you need is your total operating expenses and your total revenue for the same period.

Here’s the formula:

OER = Total Operating Expenses / Total Revenue

Let’s go back to our IT company example. We found out their monthly OPEX was $28,500. Now, let's say they earned $50,000 in revenue that same month.

• OER = $28,500 / $50,000
• OER = 0.57

To see this as a percentage, just multiply by 100. That gives them an OER of 57%.

What this really means is that for every dollar the company earns, 57 cents goes right back out to cover its running costs. This leaves 43 cents to cover the direct costs of their projects and, hopefully, make a profit.

Knowing your OER helps you manage your money instead of just spending it. It's the first real sign of your business’s health and a starting point for making smarter choices about prices, spending, and growth.

What Is a Good OPEX Ratio, Anyway?

That's the next question everyone asks. The honest answer is: it depends. A "good" OER is very different from one industry to another. There's no magic number that works for everyone.

• A software company with few physical costs might have a low OER.
• A restaurant has high costs for labor, rent, and utilities, so its OER will be much higher. A restaurant's labor costs alone often use up about 30% of its revenue.
• A real estate business that depends on commissions and marketing will have a different ratio.

The key isn't to hit some universal number. It's to know what's normal for your type of business and, more importantly, to track your own OER over time.

Is it going up every month? That’s a big warning sign that your spending might be growing faster than your sales. It's time to look closely and see what’s going on.

Analyzing your OPEX helps you find ways to improve. Since paying your team is often the biggest cost for any business, it's a good place to start. To get the most from your analysis, look into ways to reduce labor costs effectively without hurting the quality of your work or your team's spirit. This is how you turn a simple calculation into a powerful tool for your business.

Common Mistakes to Avoid When Calculating OPEX

Getting your operating expenses right is very important, but it's also easy to make mistakes that mess up your numbers. Let’s talk about the common traps I see business owners fall into so you can get a clear picture of your company's health.

The biggest mistake by far is mixing up operating expenses with the Cost of Goods Sold (COGS). They sound similar, but they tell you very different things about your business.

Here’s the easiest way to remember it: COGS is the cost to make your product. OPEX is the cost to run your business. For a home builder, the wood and drywall are COGS. The salary for the office manager who answers the phone? That's OPEX.

Getting this wrong messes up your profit calculations. If you accidentally include the cost of materials in your OPEX, you'll think it costs more to run your business than it really does. This can lead to bad decisions.

Forgetting the Small Stuff

Another common mistake is forgetting all the small, regular costs. I’m talking about things like monthly software subscriptions, bank fees, or even professional memberships. They don't seem like much by themselves.

But these little expenses add up. A $50 monthly subscription might not sound like a lot, but that's $600 a year. If you have ten of those, you've suddenly got a $6,000 cost that you forgot to count in your OPEX.

• Software fees: Your sales, accounting, and project management tools all count.
• Bank and payment processing fees: The small percentage taken from every sale adds up.
• Professional licenses and dues: Yearly fees to stay licensed or be part of an industry group.

These days, technology costs are a fast-growing expense you can't ignore. In some medical offices, for example, IT can be 2% to 3% of revenue. That might sound small, but for a $2 million practice, that’s $40,000 to $60,000 a year in tech spending. It’s important to track these costs, as you can see from these insights on rising medical practice costs.

The "Miscellaneous" Trap

Finally, try not to put expenses you aren't sure about into a big "miscellaneous" or "other" category. I know it seems easy when you're busy, but it quickly becomes a black hole where costs get lost.

If you don't track your costs in the same way every time, you can't trust your financial data. Every expense needs a specific category. If you just throw everything you don't recognize into one bucket, you can't see where your money is really going. Is your "miscellaneous" spending growing because of office supplies or travel? Without clear categories, you’ll never know.

So, What Do You Do With These Numbers?

You've worked with the numbers, calculated your operating expenses, and even found your Operating Expense Ratio (OER). Great job. But this isn't just paperwork you file away. Knowing your numbers is just the beginning.

The real goal is to use this information to build a stronger, more profitable business. Let's break down what you should do next.

Start Tracking Your OPEX Monthly

Your OPEX isn't a one-time calculation. You have to track it regularly, and I mean every single month. This is how you spot problems before they get big.

Think of it like checking the oil in your car. A quick, regular check keeps the engine from breaking down. By tracking OPEX monthly, you'll see right away if a software subscription price went up or if your utility bills suddenly jumped.

This simple monthly habit helps you manage your money instead of just reacting to problems. You'll catch rising costs early and be able to control your spending better.

Create a Budget That Actually Works

Once you have a few months of OPEX data, you can build a real budget. A budget isn't meant to restrict you; it’s a plan for your money. You finally know what you actually spend on rent, software, and marketing each month.

Use these numbers as your starting point. From there, you can decide where to spend more or cut back. For example, if you see you spent $500 more on marketing than you planned but it brought in a lot of new customers, that’s probably a good investment. But if a software tool’s cost went up by $200 and no one on your team is using it, you know exactly where to save money.

Your budget becomes your financial plan, making sure every dollar you spend helps you reach your goals.

Compare Your Numbers and Make Changes

Finally, it's time to use your OER to see how your business compares to others. While every business is different, you can usually find general numbers for your industry online. If the average for your industry is a 60% OER and you’re at 80%, that’s a clear sign that you need to take a closer look at your costs.

This comparison might be what you need to:

• Review your contracts: Are you still getting the best price on insurance or office supplies?
• Find new ways to be efficient: Could you use software to automate a boring task and save time?
• Look at your pricing: Are your prices high enough to cover your running costs and still make a good profit?

This is how the calculation leads to action. Using your OPEX numbers to take these steps is what separates businesses that just get by from the ones that really succeed.

A Few Common Questions About OPEX

When people first start looking at their operating expenses, a few questions always come up. Let's answer them.

Is Payroll an Operating Expense?

Yes, most of it is. The salaries you pay your office staff, sales team, and managers are all operating expenses. These are the people whose jobs are to run the business, not make the product.

The big exception is direct labor. If you run a cabinet shop, the pay for the workers building the cabinets is part of your Cost of Goods Sold (COGS), not OPEX. If you run a marketing agency, the salary of the designer working on a client project is COGS.

How Often Should I Calculate OPEX?

You should look at this at least once a month. If you wait longer, you won't have a clear view of your finances.

Calculating your OPEX monthly is the only way to catch problems before they get out of control. It helps you see if a cost is slowly rising or if you had a surprise expense. Waiting until the end of the year to look at these numbers means you might find big problems when it's too late to fix them.

Think of it this way: Checking your OPEX monthly is like a regular financial check-up for your business. It helps prevent a major financial problem later on.

Can OPEX Be Higher Than Revenue?

Yes, and it happens more than you might think. This is common for new businesses or companies that are growing quickly. When your operating expenses are higher than your revenue, it just means you're operating at a loss for that period.

This isn't always a bad thing if it's part of a plan for growth—like a big marketing campaign to launch a new product. But if it happens month after month, that’s a major warning sign. It’s a clear signal that your business plan isn't working as it should.

Ready to get a crystal-clear view of your business finances without the headache? The team at MyOfficeOps provides expert bookkeeping and advisory services that turn your numbers into a roadmap for growth. Get in touch today to see how we can help.