What are the operating expenses of a company?

One of the parts that we discuss in the Investment Ideas analyzes are fundamental factors such as, for example, operating expenses. An operating expense is an expense that a company incurs through its normal business operations. Operating expenses are necessary and unavoidable for most businesses. Some companies manage to reduce them to obtain a competitive advantage and increase their profits. Let's see then what it is composed of and how we can interpret it. 

What are the operating expenses of a company?

An operating expense is an expense that a company incurs through its normal business operations. Often abbreviated as OpEx, operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, pass-through costs, and funds allocated for research and development. Operating expenses are necessary and unavoidable for most businesses. Some companies manage to reduce them to obtain a competitive advantage and increase their profits. However, reducing operating expenses can also compromise the integrity and quality of operations. Finding the right balance can be difficult, but it can bring significant benefits.

What types of operating expenses does a company have?

The operating expense may vary depending on the type of sector to which it belongs, but we can determine a series of well-defined operating expenses: 

Operational activities

Operational activities are those tasks that must be performed day to day for the company to operate and generate income. Operating expenses are different from expenses related to, for example, investment in projects and loans. Operating expenses can vary depending on what a company does. In fact, some activities (and expenses) may be considered operational in one sector, but not in another. It is important to understand the distinction due to the tax deductibility of operating expenses. Some common types of operating expenses are

• Rent
• Wages and salaries
• Accounting and legal fees
• Banking expenses
• Sales and marketing expenses
• Office supplies
• Repairs
• Supply costs
• Cost of goods sold

Fixed and variable expenses

Operating expenses can be fixed or variable. A fixed cost is established for a fixed period of time; it does not change. Typically refers to recurring expenses such as rent, interest payments, insurance payments, and bank fees. It is not affected by the production levels of goods and services. A variable cost can change depending on the levels of production and sale of products or services. A company can better manage its operating expenses when its managers understand the difference between its fixed and variable costs.

Management of operating expenses

Operating expenses are necessary and unavoidable for most businesses. Some companies manage to reduce them to obtain a competitive advantage and increase their profits. However, reducing operating expenses can also compromise the integrity and quality of operations. Finding the right balance can be difficult, but it can bring significant benefits. An income statement tracks a company's income and expenses over a given period to provide a snapshot of its profitability. Income statements usually classify expenses into six groups: cost of goods sold; selling, general and administrative expenses; Depreciation and amortization; Other operating expenses; interest expenses; and taxes on profits.

Differences between operating expenses and capital expenses

Abbreviated as CapEx, capital expenditures are purchases a company makes as an investment. Capital expenditures include costs related to the acquisition, maintenance or improvement of tangible and intangible assets. The company's tangible assets include real estate, factory equipment, computers, office furniture, and other physical capital assets. Intangible assets include intellectual property, copyrights, patents and trademarks. For example, if a company spends €100.000 on payroll, it can amortize all of that expense in the year it is incurred, but if a company spends €100.000 on the purchase of a large piece of factory equipment or a vehicle, You must capitalize the expense or amortize it over time.