Quick answer
Operating expenses, often called opex, are the regular costs of keeping a business running: rent, wages, utilities, insurance, software, marketing, fuel and similar bills. They're generally tax deductible in the year they're incurred. Lenders subtract them from revenue to see how much money is left over each month to meet loan repayments, so opex is central to any serviceability assessment.
Key points
- The ongoing costs of running the business, not buying long-lived assets
- Generally deductible in the income year they're incurred
- Some are fixed, like rent; others rise and fall with sales
- Lenders compare opex with revenue to judge whether repayments are affordable
Think of operating expenses as the cost of opening the doors each day. Before a café sells a single coffee, it has rent, power, insurance, wages, POS software and cleaning to pay. Those costs keep coming whether the week is busy or quiet, and they’re the first thing a lender wants to understand.
What’s included in operating expenses?
Typical items on an Australian small business profit and loss include:
- Rent or occupancy costs, plus outgoings like council rates passed on by the landlord
- Wages, superannuation, workers compensation and payroll tax where it applies
- Electricity, gas, water, phone and internet
- Insurance premiums
- Accounting, legal and bookkeeping fees
- Software subscriptions and merchant fees
- Advertising and marketing
- Vehicle running costs, fuel and repairs
- Interest on business borrowing
What’s left out matters too. Buying a new oven or van is capital expenditure, deducted over time rather than straight away. The principal portion of a loan repayment isn’t an expense at all.
Fixed and variable costs
Splitting opex this way tells you how exposed the business is in a slow month.
| Type | Behaviour | Examples |
|---|---|---|
| Fixed | Roughly the same each month | Rent, insurance, salaried staff, software |
| Variable | Moves with activity | Casual wages, fuel, merchant fees, packaging |
| Semi-variable | Base amount plus usage | Electricity, phone plans |
A business with mostly fixed costs feels quieter months sharply, while one with mostly variable costs flexes more easily. The break-even calculator uses this split to show the sales you need just to cover your costs.
How the ATO treats operating expenses
Generally, the ATO allows running costs to be claimed in the income year they’re incurred, provided they relate to earning business income and you keep records. Where an expense is part private, like a phone, only the business share is claimable. Any GST you claim back as a credit on your BAS can’t also be deducted. For small businesses, certain prepaid costs covering 12 months or less can be claimed upfront.
Why lenders look at opex first
Every business loan assessment comes back to one sum: revenue, minus operating expenses, equals what’s available to meet repayments. That’s the core of serviceability.
Lenders also read the detail. They often add back costs that won’t continue, such as a one-off legal bill or private expenses run through the business. Our page on add-backs explains how that works. Rising expenses without matching revenue growth raise questions. Banks typically read this from your financial statements, while low-doc and fintech lenders estimate it from bank statements, so tidy, separate business accounts help either way.
If the timing of bills is the issue rather than the size of them, see how working capital loans work or ask us about a short-term buffer.
Worked example: a suburban café
Here’s an illustrative month for a café in Geelong turning over $85,000:
| Item | Monthly |
|---|---|
| Cost of food and drinks | $27,000 |
| Wages and super | $30,500 |
| Rent and outgoings | $7,800 |
| Power and gas | $2,600 |
| Insurance, software, accounting | $2,100 |
| Marketing and other | $1,500 |
| Operating expenses (excluding food and drinks) | $44,500 |
After food costs and opex, about $13,500 a month remains. A lender considering a fit-out loan would ask whether that surplus holds up in winter, and how much of it the owner draws as personal income. If quiet months drop revenue to $65,000 while most opex stays put, that surplus could disappear.
Related terms
- Profitability: what’s left of revenue after expenses, measured as a percentage
- Capital expenditure: spending on assets rather than running costs
- Cash flow: the timing of money in and out, which opex heavily shapes
- Profit and loss statement: where operating expenses are reported
When the bills land before the income does
Plenty of sound businesses have months where wages, rent and a BAS all fall due before customers pay. That’s a timing problem, and it can usually be fixed. We can look at a line of credit, a short-term loan or property-backed funding, depending on what you’ve got to work with.
Filling in our enquiry takes about a minute, and it isn’t a credit application, so nothing is recorded on your file. Your enquiry stays with us; it isn’t passed around the market. One of our team goes over your numbers personally and then rings to discuss them. Give us honest figures for your monthly costs and revenue so our first suggestion is a realistic one.
Frequently asked questions
Are wages an operating expense?
Yes. Wages, superannuation and other staff costs are usually the largest operating expense for service businesses. Some businesses record wages for staff who directly make products under cost of goods sold instead, which is why it's worth knowing how your accountant sets out the profit and loss.
Is cost of goods sold part of operating expenses?
It depends on the presentation. Many profit and loss statements show cost of goods sold separately, above gross profit, with operating expenses listed below it. Lenders look at both, but operating expenses are the overheads you carry regardless of each individual sale.
Are loan repayments an operating expense?
Not entirely. The interest part of a business loan is a deductible expense, but the principal part is repaying borrowed money, so it isn't an expense. Lenders usually assess your ability to cover the full repayment from what's left after operating expenses.
Can I claim prepaid expenses upfront?
Small businesses can often claim certain prepaid expenses in full straight away if the service period is 12 months or less and ends before the end of the next income year. Insurance and rent paid in advance are common examples. Confirm the details with your tax agent.
How can I reduce operating expenses before applying for a loan?
Cancel unused subscriptions, review insurance and telco plans, and move private costs out of the business accounts. Cutting costs that genuinely support revenue, like marketing that works, can backfire. Lenders like to see expenses that are stable and explainable.