TL;DR

Operating expenses are what it costs to run your business day-to-day — software tools, professional services, marketing, equipment maintenance. They sit below gross profit on the P&L and directly determine how much of your revenue converts to profit.

Key Points

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Operating expenses (OpEx) are distinguished from capital expenditures (CapEx) — OpEx is recurring; CapEx is long-term investment

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For freelancers, common OpEx includes: software subscriptions, professional development, marketing, and contractor costs

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OpEx ratios (total OpEx ÷ revenue) measure operational efficiency — high ratios indicate expenses consuming too much revenue

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Operating profit = [[gross-income|gross profit]] − operating expenses (before interest and taxes)

Categories of Operating Expenses

Operating expenses typically fall into several categories¹: fixed expenses — costs that don't change with revenue volume (annual software subscriptions, professional insurance, monthly retainers for services); variable expenses — costs that scale with activity (contractor costs on larger projects, advertising spend, materials); and semi-variable expenses — fixed up to a threshold then variable (phone plans with overage charges). For a freelancer, common operating expenses include: project management and invoicing software, design or development tools, professional associations, continuing education, home office costs, and business insurance. Understanding which expenses are fixed vs. variable helps with budget planning and identifying which costs scale with growth.

Operating Expenses on the P&L

On a Profit & Loss Statement statement, operating expenses appear below gross profit (revenue minus cost of goods sold). Subtracting operating expenses from gross profit gives operating income (also called EBIT — earnings before interest and taxes). For service businesses with no inventory (typical for freelancers), cost of goods sold is often zero or represents only direct labor/contractor costs paid to deliver a specific project. In that case, operating expenses are essentially all business expenses. Operating income is the clearest measure of business efficiency — it shows profitability from core operations before financing costs and taxes distort the picture.

Auditing Your Operating Expenses

A quarterly operating expense audit is one of the highest-ROI activities for any small business. Pull your bank and credit card statements for the past 3 months, list every recurring expense, and evaluate each: Is this being used? Does it pay for itself? Is there a cheaper alternative? Many freelancers accumulate software subscriptions they've stopped using, paying $20–$50/month for tools that provided value once but now represent pure waste. Canceling even 3–4 unused subscriptions ($80–$200/month) adds $960–$2,400 annually directly to net income. Recurring expense creep is one of the most common ways operating costs grow invisibly until they become a significant drag on profitability.

References

FreshBooks — Operating Expenses ↗

freshbooks.com

FreshBooks — Profit vs. Revenue ↗

freshbooks.com

Last updated: June 9, 2026

Related Terms

Overhead

The ongoing indirect costs of running a business that cannot be directly attributed to a specific product, service, or client project, such as rent, utilities, insurance, and administrative salaries.

Business Expense

A cost incurred in the ordinary course of running a business that may be deductible from taxable income, reducing the total tax owed.

Profit & Loss Statement

A financial statement that summarizes all revenues, costs, and expenses over a specific accounting period, showing whether a business made a profit or incurred a loss.

Net Income

The total profit remaining after all revenue has been collected and all expenses — including operating costs, taxes, interest, and depreciation — have been deducted. Also called net profit or bottom line.

Profit Margin

A ratio expressing what percentage of revenue is retained as profit after expenses, used to evaluate the financial efficiency and health of a business.

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