Operating expenses guide - All UK businesses need to know

If you’re running or starting a UK business, it’s crucial to get to grips with accounting. One of the most important things to understand are the different types of expenses.

Read on for all the essentials you need to know about operating expenses (OPEX). This includes an easy-to-understand operating expenses definition, so you know what costs come under this category.

Plus, how to calculate your company’s OPEX and analyse the figures to gain valuable insight into business performance.

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What are operating expenses?

Operating expenses (OPEX) are costs directly related to the normal, everyday running of the business. They include things that are essential to keep core operations going.

Examples of OPEX include staff wages, rent or mortgage payments for your business premises, and utilities and energy bills. Also covered under the category of operating expenses are things like¹:

• Marketing and research costs
• Licence fees
• Insurance
• Accounting fees
• Office supplies purchases
• Vehicle and travel expenses.

Managing and tracking operating expenses is essential for ensuring the profitability for your business. If your OPEX figure is too high, this can eat into your profits.

However, it’s also important to balance operating expenses and spend where you really need to. Many expenses are essential for maintaining high standards of productivity and quality, as well as customer and employee satisfaction.

For example, if you shrink your budget for business premises, this could lead to a poorer standard of workplace for your employees. Or if you cut spending on things like accounting or professional services fees, you could face a compliance issue or an unexpected tax bill.

How to calculate operating expenses?

To calculate your company’s operating expenses, you simply need to add up the cost of everything necessary for the core operations of your business. This gives you your OPEX figure.

The next step is to compare your total operating expenses with income. This will give you an indication of how expenses are impacting on profit and performance, and how you can reduce costs while improving sales. Generally, it shows how well a business is managing its money.

The key thing you need to know about is the operating expenses ratio (OER). The operating expenses formula is as follows²:

Let’s run through a quick example.

Let’s say that your company has total operating expenses of £7,000, made up of staff salaries, rent, utilities and insurance. Your company’s gross income for the year is £60,000.

To find your OER, all you need to do is divide the two. So:

As a general rule, a lower OER percentage is better. However, any OER figure between 60% and 80% is generally considered reasonably healthy². Once you’ve calculated your OER, you can go on to assess other things like your operating profit margin.

What are non-operating expenses?

When calculating your OER, there are certain business costs that you should leave out. Non-operating expenses are things like bank fees and interest charges, currency exchange fees, depreciation, lawsuit costs, restructuring expenses and loan repayments.

These are not essential for the day-to-day, revenue-generating operations of your business. It’s still important to keep track of non-operating expenses, but you’ll need to separate them from your OPEX figures.

Non-operating vs. operating expenses examples

To make it easier to distinguish between non-operating and operating expenses, here are a few examples:

Operating expenses and operational performance analysis

Getting to grips with operational expenses is critical to understanding and improving the operational performance of your business. If your expenses are too high, it could deter investors and even put the future of your business at risk.

Careful and efficient management of operational expenses ensures that profits and productivity remain healthy, and the business continues to run smoothly.

Difference between operating and capital expenses (OPEX vs. CAPEX)

There’s one last thing you need to know about in relation to operating expenditure. This is capital expenses or CAPEX.

CAPEX is quite different from everyday operating expenses. The term refers to purchases that your business makes as an investment. For example, buying a new property, a vehicle or a large piece of equipment, or upgrading the machinery in a factory. It can even relate to the purchase of a new computer equipment, or what is described as intangible assets like copyrights, patents and trademarks.

These expenses are treated differently for tax purposes, allowing you to claim capital allowances and reduce your overall tax bill³.

Manage operating expenses with Wise Business

Now that you understand more about how to calculate and manage your firm’s operating expenses, it could be a good time to reassess how you pay them.

For an easier way to manage your expenses, check out the Wise Business account. From one powerful multi-currency account, you can effortlessly pay international invoices in a choice of local currencies at the mid-market exchange rate.

It’s quick, cost-effective and convenient to send money to vendors, employees and contractors worldwide.

What’s more, you can sort employee expenses easily and cleanly with Wise expense cards. Pre-set a spending limit for each one, take full control of access and track everything you need to with integrated accounting tools.

Managing international cashflow is a breeze with Wise. This leaves you free to focus your attention on the important things, like boosting performance and growing your business.

After reading this guide, you should hopefully have a better understanding of what operating expenses are and how to calculate them. We’ve covered a few examples of what does and doesn’t count as OPEX, along with the operating expenses ratio formula.

Remember that the more information you have about your business cash flow, the better you can manage it. You’ll also be in a stronger position when it comes to submitting your business tax return at the end of the tax year, as you’ll have all the essential facts and figures at your fingertips.

Sources used for this article:

Sources checked on 31-08-2022.