Get a clear breakdown of operating expenses, what’s included, and how today’s CFOs optimize them to boost profitability and efficiency.
Get a clear breakdown of operating expenses, what’s included, and how today’s CFOs optimize them to boost profitability and efficiency.
Most business leaders can recite their revenue numbers while half-asleep, but ask them about their operating expenses and you'll get that deer-in-headlights look followed by a vague wave toward "overhead" or "you know, the stuff we need to keep the lights on."
Plot twist: That's leaving serious money on the table.
Operating expenses aren't the boring stepchild of financial management—they're strategic levers that separate the profitable companies from the ones that burn through cash faster than a crypto day trader.
Smart CFOs know that OPEX optimization can boost margins by 10-30% without touching a single customer or product feature.
Operating expenses (OPEX) represent the costs incurred in the normal course of running a business, excluding the direct costs of producing goods or services and major capital investments.
Think of OPEX as the fuel that keeps the engine running—essential for daily operations but separate from both the raw materials that go into your product and the big-ticket items you buy to grow capacity.
Here's the litmus test for whether an expense qualifies as OPEX:
Common OPEX culprits include salaries, monthly software subscriptions, office rent, utilities, insurance premiums, and legal fees.
What makes operating expenses fascinating (yes, we're using "fascinating" and "expenses" in the same sentence) is their relationship to time rather than production volume. Whether you sell one unit or one thousand units this month, your office rent remains stubbornly the same.
This time-based characteristic makes OPEX both predictable and controllable—two qualities that smart CFOs leverage like secret weapons for competitive advantage.
The OPEX universe organizes into several major categories, each playing a different role in the business symphony. Let's break down the greatest hits:
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SG&A forms the backbone of most OPEX discussions and typically includes:
Pro tip: SG&A often represents the largest single component of operating expenses for service-based businesses. If your SG&A is growing faster than your revenue, it's time for some serious soul-searching.
This category encompasses everything that makes potential customers aware you exist:
Smart companies track marketing OPEX against customer acquisition costs and lifetime value metrics. If you're spending $100 to acquire a customer worth $50, there's an issue.
Welcome to the subscription economy, where software costs accumulate faster than streaming services in a teenager's bedroom:
Common tech OPEX includes:
The subscription model makes these costs predictable but creates ongoing commitments that require regular evaluation. That design software you used once in 2019? Still charging you monthly.
Even in our remote-work world, businesses need physical presence:
These expenses often represent fixed commitments with lease terms extending multiple years, making them critical considerations for long-term financial planning.
When you need skills you don't have in-house:
Reality check: Early-stage companies might spend heavily on legal formation and compliance, while mature businesses focus more on ongoing audit and specialized advisory services.
Here's where many finance teams get tripped up—the line between OPEX and other categories isn't always crystal clear.
A company-wide software license? OPEX.
Specialized equipment leases or professional development training? Welcome to the gray zone.
The key test: Does the expense support ongoing operations rather than creating long-term assets or directly producing goods and services?
The OPEX vs CAPEX distinction isn't just accounting nerdery—it shapes both financial reporting and tax strategy in ways that can save (or cost) you serious money.
OPEX provides immediate tax benefits but doesn't build balance sheet value. Spend $50,000 on software subscriptions this year? Deduct the entire amount immediately.
CAPEX requires a larger upfront investment but creates assets that can support borrowing capacity and provide depreciation tax shields over time. Buy a $50,000 server? Depreciate it over three to five years.
Understanding how different agencies treat operating expenses affects your financial statements, tax liability, and investor presentations.
Operating Expenses: Immediately expensed in the period incurred. Cloud subscriptions, salaries, rent, and marketing costs all hit your P&L immediately.
Capital Expenditures: Recorded as assets and depreciated over their useful life, spreading the expense across multiple periods.
Section 162 Ordinary Business Expenses: Deductible in the year paid if ordinary, necessary, and reasonable for your business.
Capital Expenditures: Must be capitalized and depreciated according to IRS schedules, regardless of book treatment.
Cloud software subscriptions are generally operating expenses for both GAAP and IRS, while purchased software may be capitalized. Equipment leases can be structured as operating expenses under certain conditions.
Operating expenses directly impact the three metrics that keep finance leaders awake at night (in a good way): profitability, scalability, and cash flow predictability.
OPEX sits in prime real estate on your income statement—right between gross profit and operating income. This visibility means investors, lenders, and potential acquirers scrutinize every line item to gauge management competence.
Companies that grow revenue while keeping OPEX growth rates lower demonstrate something investors love—operational leverage. It's like finding a unicorn, but with spreadsheets.
EBITDA calculations start with operating income, making OPEX control directly relevant to this widely used valuation metric. Companies with optimized operating expense structures often command higher valuation multiples because they prove two critical things:
Get OPEX right, and your business becomes more valuable. Get it wrong, and prepare for awkward investor meetings.
For growing businesses, operating expenses represent the infrastructure costs of growth. Unlike the cost of goods sold (which should scale proportionally with revenue), well-managed OPEX creates economies of scale.
The same accounting team supporting $1 million in revenue might handle $3 million with minimal additional cost. This operational leverage becomes your secret weapon as companies mature.
Unlike inventory purchases that can be adjusted quickly, many operating expenses involve ongoing commitments through leases, employment contracts, and service agreements. Understanding the fixed versus variable nature of OPEX helps CFOs model different scenarios and maintain adequate cash reserves.
Burn rate calculations rely heavily on OPEX analysis. Monthly recurring operating expenses, combined with minimal revenue, determine how long current cash reserves will last. This analysis influences everything from fundraising timing to strategic pivots.
Effective OPEX analysis goes beyond tracking monthly totals like a glorified accountant. Strategic CFOs examine operating expenses through multiple analytical lenses to spot optimization opportunities and predict future trends.
Track each major expense category as a percentage of revenue to reveal efficiency trends:
Monthly OPEX tracking exposes gradual cost creep that annual comparisons miss:
Break down expenses by department rather than accounting category:
This approach reveals whether marketing, operations, or administration drives cost increases.
Understanding industry norms and key KPIs helps evaluate spending levels, for example:
Watch for these warning signs in your OPEX analysis:
costs are increasing 20%+ annually
are not tracking with customer acquisition
are growing faster than revenue
remain high with the remote workforce
See how every piece of OPEX analysis can give way to actionable insights that drive immediate performance improvements? Just by conducting analysis and looking for red flags, the company would have various ways across the board to cut costs and be more efficient without sacrificing growth potential or operational effectiveness.
The art of operating expense optimization lies in distinguishing between valuable investments and wasteful spending. Successful cost reduction maintains operational effectiveness while eliminating redundancy and inefficiency.
Reality check: Most finance teams attack OPEX optimization like they're defusing a bomb—terrified they'll cut something critical. But smart optimization isn't about slashing and burning; it's about surgical precision.
Repetitive tasks are profit killers disguised as "just how we do things":
Prime automation targets:
Most automation investments pay for themselves through reduced labor costs and improved accuracy.
Annual renewals provide natural opportunities for immediate savings:
Negotiation strategies that work:
Pro tip: That "non-negotiable" contract probably has more wiggle room than you think.
The average company wastes software spend on redundant or unused tools.
Common consolidation wins:
Focus on role effectiveness rather than simple headcount reduction:
Questions to ask:
Remember: Some positions create exponential value, while others might be consolidated or redesigned.
Operating expenses occupy prime real estate on your financial statements—they're impossible to hide and everyone's watching how you manage them.
OPEX appears in the spotlight position, immediately after gross profit and before operating income:
The standard progression:
This structure makes the relationship between revenue growth and expense control immediately apparent to anyone reading your financials. Investors and lenders scrutinize this section for spending discipline and operational efficiency trends.
EBITDA calculations add back depreciation and amortization to operating income, but operating expenses remain fully reflected. Companies with well-controlled OPEX relative to revenue show strong EBITDA margins, which translates to higher valuations, better access to capital, more investor interest, and improved lending terms.
The cash flow statement reflects operating expenses through the operating activities section, showing actual cash outflows during the reporting period. Unlike depreciation or other non-cash expenses, OPEX directly impacts cash generation and availability for growth investments or debt service.
You can have profitable operations on paper, but struggle with cash flow if OPEX timing doesn't align with revenue collection.
OPEX affects the balance sheet through working capital components: prepaid expenses (office rent paid in advance), accrued expenses (salaries earned but not yet paid), and accounts payable (vendor invoices received but not yet paid). These timing differences can significantly impact cash flow management and working capital requirements.
Monthly financial statements should clearly separate operating expenses from other cost categories to enable meaningful trend analysis.
Many companies benefit from sub-categorizing OPEX by function rather than account type—sales, marketing, administration, R&D—rather than the traditional supplies, services, utilities approach. The functional approach better reveals spending effectiveness and supports data-driven optimization decisions.
OPEX management evolves dramatically as businesses progress through different growth stages. What looks concerning in a mature company might be perfectly normal (or even necessary) for a startup.
Early-stage companies typically show OPEX patterns that would send mature company investors running for the exits.
The startup OPEX profile often includes marketing/sales at 50%+ of revenue as companies establish market presence, heavy technology investment prioritizing flexibility over cost optimization, high equity compensation that doesn't appear in traditional OPEX but represents real economic cost, and disproportionately high administrative expenses as companies establish basic infrastructure.
Building foundational capabilities before achieving scale, investing in customer acquisition channels, establishing market presence and brand recognition, and creating scalable operational infrastructure.
Startups frequently choose cloud-based solutions with higher long-term costs but lower upfront investment, subscription software with monthly flexibility, outsourced services instead of internal capabilities, and premium tools that support rapid scaling.
Established companies face different challenges and opportunities with their mature OPEX profile, focusing on efficiency and optimization rather than capability building. They leverage economies of scale in vendor negotiations and process automation, maintain predictable OPEX patterns aligned with revenue cycles, and emphasize clear ROI justification for expense increases.
Optimization opportunities include vendor consolidation to leverage purchasing power, process automation with easier ROI justification, shared services across business units, and detailed performance tracking with accountability systems.
The most successful companies view operating expenses as strategic investments rather than necessary evils.
Each dollar spent on OPEX should either maintain essential operations or contribute to future growth, with clear metrics to justify the expense.
Instead of asking "How can we cut costs?" the strategic question becomes
"How can we optimize our investment in operational capabilities to maximize returns?"
This perspective shift transforms how management approaches:
The companies that consistently outperform their competition demonstrate superior OPEX management through:
Whether you're managing a startup burning cash to achieve growth or optimizing a mature business for maximum profitability, treating operating expenses as strategic levers rather than fixed costs opens up new possibilities for performance improvement.
Here's what we see with companies that get OPEX right:
They don't just spend less—they spend smarter. They know which expenses drive growth and which ones just drive up costs. They can scale efficiently without sacrificing the capabilities that matter most.
McCracken's experienced CFO consultants help businesses benchmark their OPEX against industry standards and identify optimization opportunities that actually move the needle.
Whether you need interim CFO support during a transition, ongoing fractional CFO services for strategic guidance, or specialized training to elevate your finance team's capabilities, we bring the expertise to turn your cost structure into a competitive advantage.
Ready to see where your OPEX dollars are working hardest—and where they're just working?
Operating expenses (OPEX) are the costs a business incurs to run its day-to-day operations, excluding COGS and capital expenditures.
Common examples include rent, salaries, marketing, insurance, office supplies, and technology subscriptions.
Operating expenses are recurring and expensed immediately. Capital expenses are investments in long-term assets and are depreciated over time.
Yes—most OPEX are deductible in the year they’re incurred, but check with a tax advisor for specifics.
Start with automation, vendor negotiations, and smarter software management. Aim to reduce waste without hurting productivity or growth.
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