The Comprehensive Guide to

Passive Income Investing


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How to Become Financially Independent Through Passive Income Investing

What is an Operating Expense?

An operating expense is a day-to-day expense incurred in the normal course of business. These expenses appear on the income statement.

How Does an Operating Expense Work?

Operating expenses are costs associated with running a business's core operations on a daily basis. Common examples are cost of goods sold (COGS) and labor costs.

Operating expense typically excludes interest expense, nonrecurring items (such as accounting adjustments, legal judgments, or one-time transactions), and other income statement items not directly related to a company's core business operations.

Why Does an Operating Expense Matter?

Operating expense is a key component in the calculation for operating income, and operating income is a crucial component of many financial measures. The lower a company's operating expenses are, the more profitable it generally is.

Several things can affect operating expenses such as pricing strategy, prices for raw materials, or labor costs, but because these items directly relate to the day-to-day decisions managers make, financial measures based on operating expenses are also measures of managerial flexibility and competency, particularly during rough economic times.

It is also important to note that some industries have higher operating expenses than others. This is why comparing operating expenses or income is generally most meaningful among companies within the same industry, and the definition of 'high' or 'low' expenses should be made within this context.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.