What is OpEx (operating expenditure)?
OpEx, or operating expenditure, is the ongoing spending needed to run a business day to day, such as wages, rent, utilities and software subscriptions.
What OpEx means
Operating expenditure covers the costs that keep a business running and are used up within the year. They go straight through the profit and loss account as expenses in the period they relate to, reducing profit immediately.
The counterpart is CapEx, capital expenditure: spending on assets that will last more than a year, such as machinery, vehicles or a fit-out. CapEx goes on the balance sheet and is charged to profit gradually through depreciation.
Examples
- Salaries, employer's National Insurance and pension contributions
- Rent, rates, utilities and cleaning
- Software subscriptions and cloud hosting
- Marketing, advertising and travel
- Repairs and maintenance that restore an asset rather than improve it
- Insurance and professional fees
Example
A design studio needs new computers for five staff. It can buy them for £10,000 or lease them for £320 a month on a three-year agreement.
| Option | Type | Year 1 accounts |
|---|---|---|
| Buy for £10,000 | CapEx | Asset of £10,000; depreciation of about £3,333 |
| Lease at £320 a month | OpEx | Expense of £3,840 |
Buying uses £10,000 of cash on day one but, for tax, the Annual Investment Allowance lets the studio deduct the full £10,000 in year one. Leasing keeps cash in the business and spreads the cost evenly. Neither is always better; it depends on cash flow and how long the kit will be used.
Why it matters for your business
OpEx is the bulk of most small businesses' costs and the part you can adjust fastest. Watching it against revenue each month shows whether running costs are growing faster than sales. Most OpEx is tax deductible in the year it is incurred, provided it is wholly and exclusively for the business.
OpEx vs CapEx
The test is what the spending buys. If it is used up in the year or keeps something in its existing condition, it is OpEx. If it buys or improves an asset that will benefit the business for several years, it is CapEx. Replacing a few broken roof tiles is a repair; putting on a new roof with an extra floor is capital.
Keeping OpEx in check
Compare operating costs with the same month last year and with budget, and ask the reason for any line that has grown faster than sales. Subscription creep and unused services are common causes.
Common questions
Monthly or annual subscriptions, such as Xero or Microsoft 365, are OpEx. Buying a perpetual software licence or paying for bespoke software development that will be used for several years is usually CapEx and is amortised over its useful life.
Most of it is. Revenue expenses incurred wholly and exclusively for the trade reduce taxable profit in the year. Exceptions include business entertaining, fines and costs with a private element, which must be added back or apportioned.