Operating expenses.
In plain English
Operating expenses are the recurring costs a company incurs to keep operating, listed below gross profit on the income statement and subtracted to reach operating income. Typical lines are selling, general and administrative expenses, research and development, and depreciation and amortization. They differ from cost of goods sold because they do not scale one for one with units produced. They differ from interest and taxes because those sit below operating income and relate to financing and government rather than operations. Watching operating expenses as a share of revenue shows whether a growing company is getting more efficient or just getting bigger.
01Why it matters
These are the costs that keep running whether or not you sell anything this month, which is why they decide how long a slow quarter can last before it becomes a crisis.
02The math, step by step
Say gross profit is 240,000 dollars and operating expenses are 180,000 dollars, so operating income is 60,000 dollars. If revenue doubles and operating expenses rise only to 220,000 dollars, operating income jumps to 260,000 dollars, because most of that overhead did not double with sales.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
COGS is the cost of the product itself. Operating expenses are the cost of the company around the product. The salary of a factory worker building units is usually COGS. The salary of the recruiter who hired that worker is an operating expense. The split is what makes gross margin meaningful.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice