Operating expenses are the recurring costs that keep a business running day to day. Understanding what to include in operating expenses helps teams budget accurately, forecast cash flow, and report compliant financials.
Below is a quick reference table that outlines common categories, examples, and where each item typically appears in financial statements. This layout is designed for finance teams, founders, and managers who need clarity on how costs are classified.
| Category | Typical Examples | Financial Statement Impact | Key Policy Notes |
|---|---|---|---|
| Cost of Revenue | Direct materials, production labor, subcontractor fees | Income statement, gross profit calculation | Only include costs directly tied to delivering the service or product |
| Sales & Marketing | Advertising, commissions, CRM tools, event sponsorships | Income statement, customer acquisition cost | Separate from administrative costs to track campaign ROI |
| General & Administrative | Executive salaries, legal fees, accounting software, office supplies | Income statement, operating income | Include only costs that support overall business operations |
| Technology & Utilities | SaaS subscriptions, cloud hosting, phone, electricity | {"data-purpose": "operations"}Income statement, overhead allocation | Allocate shared tools to departments using fair cost rules |
| Occupancy Costs | Rent, property insurance, maintenance, cleaning | Income statement, operating margin | Include both owned and leased workspace expenses |
Cost of Revenue and Direct Operating Costs
Cost of revenue captures the direct costs incurred to deliver your product or service, including materials, production labor, and subcontractor work. These costs vary with volume and are central to calculating gross margin. Accurate tracking here supports better pricing and product decisions.
Within this category, what to include in operating expenses often focuses on items that vary with output, such as raw materials, outsourced manufacturing, and direct support costs. Exclude long-term asset purchases or one-time implementation fees, as these belong elsewhere in the financial statements.
Separating cost of revenue from overhead ensures that gross profit reflects true production efficiency. Teams should document clear rules for what counts as direct so accounting entries remain consistent across periods.
Sales and Marketing Expenses
Sales and marketing expenses cover all activities that drive demand and convert leads into customers. Typical items include digital ads, campaign production costs, partner commissions, and marketing automation tools. These costs should be aligned with measurable campaigns to evaluate performance.
When defining what to include in operating expenses for this area, consider recurring platform subscriptions, trade show booths, content production, and ABM programs. Exclude costs tied to product development or long-term brand projects unless they are explicitly part of a revenue-generating initiative.
Consistent classification here helps leadership understand which channels deliver sustainable growth. Reviewing these expenses regularly against pipeline and revenue data ensures efficient allocation of budget.
General and Administrative Overhead
General and administrative costs support the core infrastructure of the business, from finance to human resources. Examples include executive salaries, professional services, corporate insurance, and compliance fees. These items are necessary but do not directly generate revenue.
In deciding what to include in operating expenses for G&A, focus on roles and tools that enable day-to-day governance. Items like board retainers, legal contracts, and finance systems fall here, while major debt payments or capital investments should be classified separately.
Keeping G&A lean and transparent improves operating margin and makes it easier to benchmark against similar companies. Documenting approval workflows prevents scope creep and maintains fiscal discipline.
Technology, Utilities, and Occupancy
Technology and utilities encompass the tools and services that keep teams connected and productive. This includes SaaS licenses, cloud hosting, phone plans, and office electricity. These costs are often indirect but essential for operational continuity.
When determining what to include in operating expenses, evaluate whether each software or utility serves the entire business or a specific project. Shared tools should be allocated based on fair usage to avoid hiding true overhead in product costs.
Occupancy costs cover rent, facility maintenance, security, and cleaning for office locations. For hybrid or remote models, this category may include home office stipends or co-working allowances. Consistent rules here protect budgets and simplify forecasting.
Streamlining Operating Expenses Across the Organization
Clear policies and consistent categorization make what to include in operating expenses straightforward to communicate and follow.
- Document classification rules for each major expense category
- Standardize chart of accounts to avoid duplicate or ambiguous line items
- Implement approval workflows that enforce policy at the point of spend
- Review allocations monthly to ensure shared costs are assigned fairly
- Align budgeting and actuals reviews to spot deviations early
FAQ
Reader questions
How do I classify contractor payments that support both sales and product teams?
Classify contractor costs based on the primary purpose of the work. If the contractor is focused on campaign execution or market research, record as Sales & Marketing; if the work supports internal systems or administrative tasks, record as General & Administrative.
Should employee training and development be part of operating expenses?
Yes, routine training and professional development are typically included in operating expenses under G&A, provided they are not directly tied to a specific revenue-generating project or capitalized as an intangible asset.
Can depreciation be included in operating expenses, or should it be treated separately?
Depreciation on property, plant, and equipment is usually presented separately below operating expenses, often under operating income or non-cash adjustments. This keeps operating earnings focused on cash-based recurring costs.
What should I do with one-time expenses like rebranding or system migrations?
Treat one-time initiatives as separate line items or notes, rather than blending them into recurring operating expenses. This preserves clarity when comparing period-to-period performance and avoids distorting ongoing cost controls.