What are operating expenses?

Operating expenses are best defined as expenditures that a business incurs as part of its normal operations. This includes the costs necessary to keep the business running on a day-to-day basis, which encompasses expenses related to selling, general, and administrative activities. Examples of operating expenses include rent, utilities, salaries, and office supplies.

Understanding this definition helps separate operating expenses from other financial terms. For instance, production costs refer specifically to the costs associated with manufacturing goods and providing services, encompassing both direct costs like raw materials and labor, and not merely reflecting the ongoing operational costs. Additionally, operating expenses are distinct from cash outflows overall, as cash outflows can include capital expenditures, payment of debts, or investments that do not reflect the ongoing operational costs of the business. Similarly, investments in equipment are typically categorized as capital expenditures, which are not part of the normal operating expenses but rather relate to the long-term acquisition of assets to enhance the business's capacity and productivity.