What Is OpEx? A Guide to Understanding Operating Expenses

Biotech companies face unique financial challenges, requiring heavy investment in research and development (R&D) while managing budgets carefully to stay afloat. For startups, generating revenue may not be viable in the early stages, often relying instead on grants or external funding. However, fundraising can be particularly difficult, especially given reduced access to funding and the exceptionally long discovery and development cycles in biotech.

Tracking and managing operating expenses (OpEx) is essential for financial stability and growth, no matter the industry. This guide introduces the fundamentals of OpEx, explores why it’s crucial for biotechs, explains key differences between OpEx and CapEx, and provides tips for managing operating expenses effectively. Additionally, we’ll look at how leasing equipment can be a smart OpEx management strategy for smaller biotech companies.

What are Operating Expenses?

Operating expenses (OpEx) are the day-to-day costs required to run a business’s core operations. These costs can be either one-time or recurring payments but must be paid to keep the company functioning smoothly.

Often referred to as selling, general, and administrative expenses (SG&A), OpEx includes similar types of costs but can appear as separate line items on the income statement, depending on a company’s preferred reporting method. It’s up to management to decide how detailed they want their expense reporting to be.

Common examples of OpEx include:

• Payroll and employee salaries
• Research and development
• Rent for office or lab space
• Repair and maintenance costs
• Utilities
• Office supplies
• Business travel
• Sales and marketing costs
• Accounting and legal fees
• Property taxes

While these expenses support core business functions, they differ from cost of goods sold (COGS), which directly relates to producing goods or services. COGS covers costs like direct labor, raw materials, and production overhead—expenses directly tied to creating what the company sells. OpEx, on the other hand, includes indirect costs necessary to operate but unrelated to production.

In short, while both OpEx and COGS impact profitability, OpEx excludes direct costs like COGS and is reported separately on a company’s income statement. OpEx also excludes non-operating expenses like investments, interest payments, and one-time expenses, which don’t relate to ongoing operations.

OpEx vs. CapEx

Operating expenses (OpEx) and capital expenditures (CapEx) are both essential business expenses, but they differ significantly in how they’re categorized and reported on financial statements. Let’s explore their similarities and differences.

Similarities

Both OpEx and CapEx involve costs that a business incurs to support operations. These expenses often follow a similar purchasing process, involving bid solicitation, contract reviews, payment coordination, and record-keeping. Both OpEx and CapEx also reduce net income on the income statement, impacting a business’s bottom line.

Differences

The primary difference between OpEx and CapEx lies in the types of costs each represents and how they’re treated in financial reporting. According to generally accepted accounting principles (GAAP), these expenses have distinct accounting treatments:

• OpEx: OpEx covers the day-to-day operating costs necessary to run core operations. Examples of operating expenses include payroll, utilities, research and development, office supplies, and property taxes. These expenses are reported on the company’s income statement as incurred and impact net income directly. Because they don’t provide long-term value, OpEx does not involve depreciation or amortization.
• CapEx: Capital expenditures, or CapEx, involve major purchases that provide long-term value, such as real estate, equipment, and infrastructure. CapEx items appear on the balance sheet and are depreciated or amortized over time to reflect their ongoing usefulness. CapEx is common for assets like machinery, vehicles, buildings, and other fixed costs that benefit the company over multiple periods.

Taking a Strategic Approach

Understanding when to invest in CapEx and when to focus on OpEx is critical for sound financial planning. OpEx typically involves smaller, more flexible expenses that impact short-term operations, while CapEx often requires significant upfront investment and long-term planning. Managing each type of expenditure carefully enables a business to balance immediate cash flow needs with long-term growth.

In biotech, for instance, budgeting for both OpEx (e.g., lab supplies, research costs) and CapEx (e.g., laboratory equipment, facilities) is essential to ensure sustainable growth and support innovation.

Why are Operating Expenses Important?

Managing operating expenses (OpEx) is vital for a company’s financial health and long-term stability. For biotech companies, where cash flow can be unpredictable, effective OpEx management is essential to ensure resources are allocated strategically to core operations.

Poor OpEx management can quickly lead to financial distress. A notable example is Theranos, a biotech startup that collapsed amid a fraud scandal. Part of its downfall stemmed from mismanaged operating expenses, with court filings revealing over $50 million spent on operating costs in one year—despite generating minimal revenue. This failure to control administrative expenses and other OpEx contributed to Theranos’s financial instability.

By keeping OpEx in check, businesses can improve profitability, maintain a healthy balance sheet, and ensure they have funds available for essential business activities. Tracking operating costs also helps companies set realistic budgets, optimize spending, and build trust with investors and lenders. Operating expenses are often a key focus in financial statements, as investors use them to assess a company’s cost structure and potential for sustainable growth.

For biotech companies, managing OpEx—such as research and development, payroll, and utilities—can be especially challenging given the high costs of innovation and development cycles. By prioritizing efficient OpEx management, companies can control business expenses, support day-to-day operations, and avoid compromising financial stability.

How to Calculate OpEx

Calculating operating expenses (OpEx) accurately is essential for understanding your company’s financial performance. Here are a few methods commonly used to determine OpEx:

Standard Formula:

One formula for calculating OpEx is:

OpEx = Total Expenses - Non-Operating Expenses - Cost of Goods Sold (COGS)

In this formula:

• Total expenses represent all expenses incurred through day-to-day operations.
• Non-operating expenses include costs unrelated to core operations, such as interest expense, income tax, or one-time charges.
• COGS covers direct costs associated with producing goods or services, like raw materials and production labor.

By subtracting COGS and non-operating expenses from total expenses, you isolate the costs associated with ongoing operations.

Alternative Formula:

Another formula for OpEx is:

OpEx = Revenue - Operating Income - COGS

In this approach:

• Revenue represents the total income generated by sales.
• Operating income reflects profit after deducting operating costs.

Simple Summation

OpEx can also be calculated by adding up all operating expenses, excluding non-operating and capital expenses. This method may be the most straightforward if you have a detailed breakdown of costs.

By calculating OpEx, you gain a clearer view of your company’s operating income, profit margin, and overall efficiency. OpEx insights also support financial reporting, helping management make informed business decisions that align with financial goals.

Why Does Calculating OpEx Matter?

Calculating operating expenses (OpEx) is essential for assessing a business’s operating income, net income, and overall profitability. Once OpEx is calculated, you can better understand your company’s financial health through these key metrics:

• Gross Profit: This is calculated as Revenue - COGS and provides insight into the income generated after direct production costs.
• Operating Income: Calculated as Gross Profit - OpEx - Depreciation - Amortization, this figure represents the profit generated from core operations.
• Net Income: Calculated as Operating Income - Interest Expense - Taxes, this final figure shows the company’s total profitability after all expenses are accounted for.

With net income calculated, you can determine profit margins using these formulas:

• Gross Profit Margin: Gross Profit / Revenue
• Operating Profit Margin: Operating Income / Revenue

Tracking OpEx and related financial metrics helps identify where resources are being spent effectively and where costs may need adjustment. Monitoring profit margins and OpEx can guide management in making strategic decisions about cost-cutting, investing in business activities, and optimizing expenses for growth.

For startups and biotech companies, understanding OpEx provides a clearer view of cash flow needs, helping build trust with potential investors by demonstrating sound financial management.

How to Manage OpEx Properly

Effectively managing operating expenses (OpEx) is crucial for financial stability and growth. Here are some strategies to help biotech companies and other businesses control their operating expenditures:

• Set realistic budgets: Understanding your company’s expenses and revenue streams is the first step to creating a realistic budget. Account for fixed costs (like rent) and variable costs (like travel expenses) to ensure your budget reflects both expected and fluctuating expenses. Adjust budgets as needed based on changes in business activities or market conditions.
• Prioritize essential expenses: Not all expenses have the same impact on business operations. Prioritize costs that directly contribute to revenue generation, such as research and development, over less critical expenditures. This approach helps ensure that core operations remain supported without unnecessary spending.
• Analyze historical data: Studying historical data can reveal trends and patterns in your operating expenses. By identifying areas where costs have increased or decreased over time, you can make informed decisions about where to focus cost-cutting efforts or allocate resources for growth.
• Implement cost-saving measures: There are many ways to reduce operating costs without impacting business efficiency. Options such as remote work can reduce real estate and utility costs, while encouraging employees to use public transportation can cut travel expenses.
• Benchmark against industry standards: Comparing your OpEx to industry benchmarks provides valuable insights. If your expenses are significantly higher than those of similar businesses, it may highlight inefficiencies that need to be addressed.
• Regularly review expenses: A consistent review of expenses helps identify areas for cost reduction or optimization. This could mean renegotiating supplier contracts, switching to more affordable solutions, or eliminating unnecessary costs.
• Consider leasing equipment: For biotech companies that rely on specialized equipment, leasing can be an effective OpEx management strategy. Leasing allows companies to spread out costs over time, improving cash flow and reducing the need for significant upfront investments. Additionally, leasing offers flexibility for upgrading equipment as technology advances, which can be essential in a rapidly evolving field.

Optimize Your Biotech OpEx Management

Managing operating expenses (OpEx) is essential for biotech companies striving to maintain financial stability while advancing research and development. Effective OpEx management enables businesses to preserve cash flow, allocate resources strategically, and scale operations efficiently. By regularly reviewing expenses, setting realistic budgets, and leveraging cost-control strategies, biotech companies can create a sustainable financial foundation for long-term success.

One way to optimize OpEx is through equipment leasing, which allows businesses to access high-quality lab instruments without the heavy upfront costs of purchasing. Leasing helps preserve working capital, reduce financial risk, and provide flexibility as research needs evolve. Instead of committing to large capital expenditures, leasing enables biotechs to acquire cutting-edge equipment while maintaining liquidity for essential operational costs.

For biotech companies looking to better manage OpEx and improve financial efficiency, leasing can be a strategic solution. Learn more about how equipment leasing can support your business goals and help optimize cash flow.