Operating Expenses (OpEx)

These costs continue even in a slow month, so they decide how much revenue a business needs to break even. They are also the part of the cost base a manager controls most directly when cash is tight, because cutting them leaves the cost of delivering the product untouched. Left unreviewed, they tend to grow quietly: a subscription added for one project, a role that outlived its purpose, three tools doing one job.

• List every recurring cost that does not scale with a single sale.
• Review the list every quarter, not once a year.
• Separate costs that are essential from costs added for a project that has since ended.
• Track operating expenses as a share of revenue over time, not just the total, so growth does not hide waste.
• Decide cuts early, because a planned cut is calmer than one forced by an empty bank account.

Operating expenses are what a business spends to keep operating, whether or not it makes a particular sale this month. Typical lines are salaries for people who do not directly produce the product, office rent, software subscriptions, marketing, accountancy fees and insurance. Accountants often group them as sales and marketing, research and development, and general and administrative costs.

They sit below gross margin on the profit and loss statement. Gross profit is revenue minus the direct cost of delivering the product. Operating profit is gross profit minus operating expenses.

• Mixing operating expenses with cost of goods sold, which distorts gross margin. Where a cost belongs, such as customer support, depends on the accounting policy, so ask the accountant and stay consistent.
• Confusing OpEx with capital expenditure (CapEx), which is a one-off purchase of something lasting, such as equipment.
• Cutting marketing or sales spend first without checking what it returns.