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What are operating expenses?

Operating expenses are those expenses that are incurred by a business through its regular business operations. These expenses are incurred from day-to-day business activities.

Treating Operating Expenses in your books

Operating Expenses, also known as OpEx, are not related to the production of a product (Ex: Cost of goods sold). These expenses affect the income and the cash flow of a business. So, operating expenses are recorded in the Income Statement and the Cash Flow Statement of a business.

  • Income Statement - Also known as Profit & loss statement, this financial statement focuses on the revenues (operating and non-operating), expenses (primary and secondary activity), gains, and losses. Operating expenses along with expenses incurred from production of the product are recorded under primary activity expenses.

  • Cash flow statement - A cash flow statement reports a company’s flexibility, liquidity, and overall financial performance. It is segmented into 3 parts: Operating, Investing, and Financial cash flows. Operating expenses along with expenses incurred from production of the product are recorded under Cash flows from operating activities.

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Fun facts about Operating Expenses

  • Salary/wages paid to full-time staff are considered operating expenses. Whereas, the cost of hiring labor, and outside wage payments for producing a product is calculated under Cost of Goods Sold.

  • Regular business expenses like rent, utilities, etc. that are incurred while securing new business aren’t considered operating expenses.

  • For MNCs and businesses of massive scale, it’s impractical and nearly impossible to calculate the actual operating expenses. It is usually shown as a projection when doing budgets for the next fiscal year.