Operating Expenses refer to the ongoing costs a company incurs to run its core business operations. These expenses are essential for day-to-day functioning but do not include costs directly related to producing goods or services, such as the cost of raw materials or direct labor. Instead, operating expenses cover items like rent, utilities, salaries of administrative staff, marketing costs, and office supplies.

In a companyís income statement, operating expenses are deducted from gross profit to arrive at the operating income or EBIT (Earnings Before Interest and Taxes). Efficient management of these expenses is crucial, as higher operating costs can reduce profitability even when sales remain strong. For example, if a companyís sales increase but its administrative or advertising costs rise faster, the overall profit margin may shrink.

Operating expenses are broadly classified into two types: Selling, General, and Administrative (SG&A) expenses and Research and Development (R&D) expenses. SG&A includes costs like sales commissions, office rent, and insurance, while R&D focuses on innovation and product development. Investors and analysts often study the operating expense ratioówhich compares operating costs to revenueóto assess a companyís efficiency and cost control.

From an investorís perspective, consistent monitoring of operating expenses helps evaluate how well management is controlling costs relative to revenue growth. Companies that manage to reduce these expenses without compromising business quality tend to improve their profitability and shareholder value over time. Understanding operating expenses is therefore vital for analyzing a companyís financial health, sustainability, and long-term growth potential.