Operating Expenses Explained: What Counts, What Doesn’t, and How to Trim the Fat

Operating expenses are the costs a business pays to run its operations, shown below gross profit on the income statement. For a service business, they're everything that keeps the business running but doesn't deliver client work directly — and they're usually where overhead quietly grows until the margin disappears.

What are operating expenses?

Operating expenses are the expenditures a business incurs to run its activities beyond the direct production of goods or services. AccountingTools (2026) defines them as costs not directly associated with producing goods or services — essentially the selling, general, and administrative costs of running the company. On a service-business P&L, they sit underneath cost of services: once you've paid for the people and tools that deliver client work, operating expenses cover everything that keeps the business itself running.

That placement matters. Cost of services scales with client work; operating expenses largely don't. When revenue dips, cost of services often dips with it, but operating expenses keep arriving — which is why an opex problem tends to show up as margin erosion before anyone notices a specific line growing.

What's included in operating expenses — and what isn't?

The boundary lines matter more than most owners realize, because misclassifying a cost can make margins look better or worse than they actually are.

Included. AccountingTools (2026) groups operating expenses into families: compensation for non-delivery staff (payroll, benefits, commissions for administrative and sales roles), office costs (rent for non-delivery space, utilities, supplies, insurance, property taxes), and sales and marketing costs (advertising, travel, sales materials). Professional services you buy — legal, accounting, consulting — sit here too.

Excluded — cost of services. The direct costs of delivering client work belong in cost of services, not opex: delivery team compensation, contractor and subcontractor fees, and the tools and travel tied to specific engagements. Mixing the two distorts both gross margin and operating margin. If you want a refresher on how that first layer of the P&L works, our gross profit margin guide for service businesses covers it in detail.

Excluded — capital expenditures. Money spent on assets the business keeps, like computers, furniture, or leasehold improvements, is capitalized and depreciated over time rather than expensed when purchased. The depreciation shows up as an expense, but the purchase price itself doesn't.

Excluded — non-operating items. AccountingTools (2026) notes that finance-related costs such as interest expense and bank fees are often excluded from operating expenses because they aren't generated by ongoing operations. Interest on your line of credit is a real cost, but it lives below the operating line.

What does a typical service-business opex breakdown look like?

Here's an illustrative monthly P&L for a service business, dissected line by line. First the totals, then each line with what to check.

The operating margin — operating income divided by revenue — comes to 12.9%. All figures in the worked examples are illustrative, not forecasts or accounting advice. Actual results depend on your business's costs, service mix, pricing, and accounting classifications.

Now the line-by-line anatomy. Each block below tells you what the line is and what's worth checking on it.

Salaries & wages (non-delivery) — $48,000

Admin, finance, HR, sales, and management payroll — everyone whose role doesn't deliver client work. It's the largest opex line in most service firms and the hardest to right-size, because each role usually exists for a reason. Check: does every role map to a clear need, and is the delivery-to-admin ratio still healthy at your current headcount?

Rent — $9,500

The lease cost for office and workspace. It's a fixed commitment that only resets at renewal, which makes it easy to ignore for years at a time. Check: when does the lease expire, and is the space sized for the team you have now rather than the team you had three years ago?

Software & subscriptions — $6,200

The SaaS stack: project management, accounting, CRM, design tools, and the long tail of monthly subscriptions. It's often mixed in cost behavior — core licenses fixed, usage-based charges variable. Check: who actually uses each tool, and are there overlapping products doing the same job?

Marketing — $11,000

Advertising, agency retainers, events, and content spend. It sits in opex but it's the line most directly tied to future revenue, so cutting it blindly can starve the pipeline. Check: what does each channel cost per lead or per client, and which line items produced work last quarter?

Professional services — $3,400

Legal, accounting, and outside consulting fees. Spiky by nature and often reactive. Check: are these engagements scoped and budgeted, or arriving as invoices nobody planned for?

Insurance — $2,100

Liability, professional indemnity, property, and related coverage. Fixed within the policy year. Check: has coverage been rebid at renewal, and do the policy limits still match the business you're running?

Other admin — $4,800

The catch-all: bank charges, small supplies, memberships, miscellaneous fees. Every P&L has one, and it's where unowned spending hides. Check: what's actually in it? A catch-all line that only grows deserves to be broken into named lines.

How do you trim operating expenses without cutting capacity?

Trimming opex is not about spending less across the board — it's about making sure each line still earns its place. Run these five questions against each line, ideally once or twice a year:

1. Is it still necessary? Does the cost still serve a purpose the business actually has, or did the need disappear while the invoice kept arriving?
2. Is it correctly scoped? Are you paying for a bigger version than you need — more seats, more square footage, more coverage than the business requires?
3. Is it delivering value? For every dollar, what do you get? Marketing and software lines answer this with data; rent and insurance answer it with comparison quotes.
4. Is the contract coming up for renewal? Renewal is the only reliable moment to change a fixed cost, so track those dates and treat each one as a decision point, not an auto-pilot.
5. Is there a cheaper comparable? Is there a comparable alternative that does the same job for less? If yes, is switching worth the disruption?

Two cautions. First, don't trim the lines that protect capacity: underfunding marketing or skimping on delivery support saves money this month and costs revenue next quarter. Second, judge fixed and variable lines differently — a variable cost should track volume, while a fixed cost needs a deliberate decision (usually at renewal) to change. If you want the deeper framework for that distinction, our fixed and variable costs guide breaks down how each type should be managed.

The goal of trimming is a leaner operating margin, not a smaller business. If you want a benchmark for what a healthy operating margin looks like, our operating margin guide for service businesses walks through the math and typical ranges. And if you'd rather test the effect of trimming a specific line on your own numbers, the SMB profit calculator lets you explore what a change in costs does to your growth potential.

Frequently asked questions

What is the difference between operating expenses and cost of services?

Cost of services covers the direct costs of delivering client work, such as delivery payroll and contractor fees. Operating expenses cover the costs of running the business that aren't tied to delivering specific work, such as rent, admin payroll, and marketing.

Are salaries an operating expense?

Salaries for non-delivery roles — admin, sales, management, finance — are operating expenses. Compensation for staff who deliver client work belongs in cost of services, which keeps gross margin accurate.

Is rent an operating expense?

Yes. Rent for the space the business occupies is an operating expense, and it's typically one of the larger fixed lines on a service-business P&L.

What is a good operating expense ratio for a service business?

There's no single right number: it depends on the business's size, service mix, and delivery model. A more useful practice is tracking your own ratio over time and investigating any line that grows faster than revenue.

How Growth Advisor helps

Operating expense review is one of the highest-yield exercises in the Growth Advisor platform. Growth Advisor connects through an Intuit-approved QuickBooks integration and benchmarks your profit and loss statement against comparable service businesses, then ranks every cost-reduction and revenue opportunity across sales, cost of sales, and overhead by its dollar impact for your business. Each ranked opportunity becomes a task distributed across your team, so trimming opex stops being a solo project for the owner.

To see which of your expense lines are leaking first, the Profit Leak Snapshot takes about 3 minutes and surfaces overlooked sales opportunities, hidden profits, and operational inefficiencies — the cash it uncovers can go toward debt reduction, winning new customers, or the growth moves you've been deferring.

Want a structured way to act on it with your team? The free 7-Day Sales and Profit Sprint gives you and your team free Growth Advisor support to put untapped capacity and already-paid-for investments to work — a week of concrete steps toward stronger sales performance and profitability.

About Us: We write practical profit and cash-flow guidance for service-business owners who want more of every dollar they earn to stay in the business. Every article is grounded in financial data, industry benchmarks, and the three profit levers we help members act on inside the platform: sales revenue, cost of sales, and overhead.