Operating Expenses: Definition, Formula & Examples

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  • 0:02 What Are Operating Expenses?
  • 0:45 Formula
  • 1:39 Examples
  • 2:00 Administrative Expenses
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Lesson Transcript
Instructor: Tara Schofield
This lesson introduces the concept of operating expenses. It explains what operating expenses are and how they are calculated. Examples of operating expenses are included.

What Are Operating Expenses?

Operating expenses can greatly impact the profitability of a business and how much cash it has. Operating expenses are the costs a company incurs that are not related to the production of a product. These expenses include items like payroll, rent, office supplies, utilities, marketing, insurance and taxes. Operating expenses are essentially the costs to keep the business running.

The more the operating expenses are, the less cash the business keeps. Because operating expenses can be a substantial drain on company resources, controlling operating expenses is an important aspect of managing a financially healthy business.

Formula

Operating expenses are found on the income statement. Every company will have different expenses based on their operations. A basic example of an operating expenses formula is below.

Operating expenses = license fees + office expenses + legal fees + insurance + travel and vehicle expenses + salaries and wages + accounting expenses + maintenance and repairs + supplies + advertising + utilities + property taxes

While this is a short list of common operating expenses, every company will have operating expenses that are unique to its needs. These expenses would be added to the list of operating expenses on the income statement and calculated with the other costs.

Examples

Operating expenses are often divided into two categories: marketing and administrative. Marketing expenses are the costs of promoting products and services. Marketing expenses include items like business and stationery printing, sales salaries, commission expenses, trade show booths, advertising, brochure printing, direct marketing expense, television and radio advertising, and print advertising.

Administrative expenses are the necessary expenses that are incurred in the course of running a business and are not directly tied to a specific product or service.

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