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Posted In: Accounting

What Is an Operating Expense?

Operating expenses have to do with the day-to-day activities of your business. Unlike Cost of Goods Sold, which deals entirely with the cost of producing a product, operating expenses include most everything else.

Some common operating expenses include:

  • Rent
  • Payroll
  • Utilities
  • Office supplies
  • Legal fees
  • Accounting fees
  • Travel costs

While operating expenses work as a catch-all of sorts, it does not include some key expenses, like interest, depreciation, or marketing costs.

When determining if something should be considered an operating expense, ask yourself two questions:

  1. Is this expense directly related to production (i.e. materials, production labor, etc.)? If so, it belongs in COGS.  
  2. If not, is the expense directly related to your business’ core operations?

In other words, do you need this thing to keep your business running properly? If the answer to both questions is no, the expense should be classified as a non-operating expense.

Managing Operating Expenses

Because operating expenses speak to the core needs of your business to run well, keeping a close eye on them is vital. If you are operating at a loss, you’ll need to find a way to either spend less or bring in more revenue. This may involve trimming payroll or cutting spending and taking a deep dive into your operating expenses. When you keep a close eye on this number each month, you will be better prepared to head off problems before they become a crisis.

What is Operating Cash Flow

Operating cash flow (OCF) represents the revenue a business generates after operational costs have been deducted. In more basic terms, it’s how much cash flow is generated from core business operations (i.e. the sales of a product or service) excluding other sources of revenue, like investments. It is one of the clearest indicators of whether a company is profitable.