operating expenses
/ OP-er-ay-ting ek-SPEN-sez /
After the phone-case shop has covered what each case cost to buy, it still has to pay the rent on the storefront, the wages of the clerk, the electricity, the advertising, and the accountant. None of those costs are part of any single case, yet without them there would be no shop at all. Operating expenses are exactly this set of everyday running costs — the price of keeping the business open and selling, beyond the direct cost of the merchandise itself.
Precisely, operating expenses are the costs a company incurs in its normal, ongoing operations that are not part of the cost of goods sold. They typically include things like rent, salaries of office and sales staff, marketing, utilities, insurance, and depreciation of equipment. On a multi-step income statement they are subtracted from gross profit to arrive at operating income. For example, a shop with 160,000 of gross profit and 120,000 of operating expenses is left with 40,000 of operating income.
Operating expenses matter because they reveal how efficiently a company runs the everyday machine of its business. Unlike cost of goods sold, many operating expenses are relatively fixed — rent and salaries continue whether sales are high or low — which is why a quiet month can wipe out profit. Note that operating expenses deliberately exclude interest on loans and income taxes; those are handled separately as non-operating items, so that operating income reflects the business itself rather than how it is financed or taxed.
A design studio's operating expenses for the year are 18,000 rent, 110,000 salaries, 9,000 software, and 6,000 advertising — 143,000 in total, all subtracted from gross profit but none of it counted as cost of goods sold.
Operating expenses are the running costs of the business beyond the cost of the goods.
Operating expenses exclude interest and income taxes by design; lumping those in would blur how well the underlying operations actually performed.