What is an Operating Expense?
An operating expense is a day-to-day expense incurred in the normal course of business. These expenses appear on the income statement.
How Does an Operating Expense Work?
Operating expense typically excludes interest expense, nonrecurring items (such as accounting adjustments, legal judgments, or one-time transactions), and other income statement items not directly related to a company's core business operations.
Why Does an Operating Expense Matter?
Operating expense is a key component in the calculation for operating income, and operating income is a crucial component of many financial measures. The lower a company's operating expenses are, the more profitable it generally is.
Several things can affect operating expenses such as pricing strategy, prices for raw materials, or labor costs, but because these items directly relate to the day-to-day decisions managers make, financial measures based on operating expenses are also measures of managerial flexibility and competency, particularly during rough economic times.
It is also important to note that some industries have higher operating expenses than others. This is why comparing operating expenses or income is generally most meaningful among companies within the same industry, and the definition of "high" or "low" expenses should be made within this context.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Prenuptial agreements hold an uneasy place in our society. Discussing a prenuptial agreement somehow seems cold and cruel -- a surefire way to end the relationship. On one hand, our...Read More →
By their names, these options strategies sound intriguing. Iron Butterfly. Iron Condor. Most investors, regardless of skill level, probably don't what these options strategies are about, but they...Read More →
As a new Congress gets underway, the typical populist clamor is emanating from Washington. But the oft-cited mantra of "cut taxes...Read More →