What are operating expenses?

Operating expenses is a term often used in the corporate world. Refers to the ongoing costs required to run a business. In other words, operating expenses are the cost of what happens behind the scenes. This includes costs related to the actual operation of the business.

The term operating expenses is sometimes abbreviated to OPEX, particularly in internal documents or communications about company earnings. The most common operating expense is employee salaries and benefits, which is often a company's biggest single expense. Other items that may be included in an expense list are advertising and marketing costs, office supplies, legal and licensing fees, utility and accounting fees, research and development costs, and raw materials.

Depreciation, which is the value an asset loses over time, is also considered an operating expense. When an asset, such as a vehicle or equipment, is worth less than the original purchase price, an accountant can subtract the new, lower value from the initial value and count the remainder as depreciation. This becomes an operating expense as long as the items continue to be used in some way in the operations of a business.

One-time costs related to the business are generally considered capital expenditures (CAPEX). This includes expenses such as purchasing new equipment when old equipment has been fully depreciated. The main reason for separating OPEX and CAPEX costs is that it gives the company and investors a more detailed view of where money is being spent before it can be turned into profit. If a person is self-employed, he can consider both OPEX and CAPEX as business expenses.

All publicly traded companies and non-profit organizations are required to include operating expense information in their annual reports. This information is often illustrated with financial charts that compare operating expenses for the current calendar year with those for previous years. This can help give readers a clear view of spending over time.

The easiest way to have this information on hand to publish these reports is to continuously track operating expenses throughout the year, either with the help of an accountant or using financial management software. If expenses vary greatly from year to year, especially if expenses increase, stakeholders will want an explanation. Having detailed records can help to determine the reasons behind such trends so that an explanation and solution for the increased costs can be discovered. Offering such explanations and finding solutions is often the job of the company treasurer.

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