operating expense
Operating expense is the everyday cost of keeping a business running, like rent, salaries and light bills, before any interest or tax is subtracted.
In plain English
Think of a small chops shop in Yaba, the type that sells suya and chicken pepper soup till late. Before the owner sees one kobo of profit, money has already left the till for gas, for the generator's diesel, for the two boys turning the grill, and for the shop rent she pays every month whether she sells plenty or sells nothing.
That steady outflow, the cost of simply keeping the lights on and the doors open, is what accountants call operating expense. It has nothing to do with paying back a loan or settling tax with FIRS. It is the cost of the business doing business, day in and day out.
A Nigerian company like a mid sized logistics firm in Lagos would list things like fuel for its delivery vans, staff salaries, office rent and internet subscriptions as operating expenses. A UK equivalent, say a small bakery in Manchester, would count flour costs aside and instead list shop rent, staff wages and electricity as its own operating expenses.
People sometimes confuse this with the cost of goods sold, but there is a clean line between them. The cost of making the product, like flour and sugar for a bakery, sits separately. Operating expense covers the running of the business around that, the rent, the wages, the marketing, the software subscriptions that keep the accounts tidy.
This number matters because it tells you how lean or how heavy a business is to run. A company sending remittances home from London, for instance, watches its operating expense closely, because high overhead calmly eats into what looks like healthy revenue on paper.
A boutique in Abuja makes ₦3,000,000 in sales for the month. Rent is ₦300,000, staff salaries total ₦450,000, electricity and generator fuel come to ₦120,000, and marketing costs ₦80,000. Total operating expense is ₦950,000, leaving ₦2,050,000 before other costs like tax are considered.
Questions people ask
Is operating expense the same as cost of goods sold?
No. Cost of goods sold is the direct cost of making or buying what you sell, like raw materials. Operating expense covers the cost of running the business around that, such as rent, salaries and utility bills.
Does loan interest count as an operating expense?
No, interest on loans and tax payments are kept separate from operating expenses because they relate to financing and government obligations, not the daily running of the business.
Why do businesses try to reduce operating expense?
Lower operating expense, without cutting quality or staff unfairly, means more of each naira earned turns into actual profit, which gives the business more room to grow or survive lean months.
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