Operating expenses are deducted after gross profit, so every pound of operating expense reduces net profit by a pound, all else being equal. They cover the costs of running the business rather than the direct costs of what you sell — premises, staff not directly involved in production, insurance, software, professional fees, marketing and administration.
Because most operating expenses are fixed or semi-fixed in the short term, they behave differently from direct costs. If sales fall, direct costs usually fall with them, but rent and salaries generally do not. That is why a business with high operating expenses is more exposed to a downturn in revenue, and why the same gross profit can produce very different net results in two businesses.
Depreciation is worth singling out. It is an operating expense that reduces net profit without any cash leaving the business in that period, which is one reason a profitable-looking business can be short of cash, and an apparently loss-making one can be generating it.
Where a cost sits — direct cost, operating expense, or capitalised on the balance sheet — is an accounting judgement, and finance arrangements can affect the answer. Hire purchase, leasing and outright purchase are not treated identically in the accounts. This is general information only; ask your accountant how a specific arrangement should be recorded.
CW Asset Finance is a credit broker, not an accountant. What we can help with is comparing funding structures across our panel of 60+ lenders so you understand the cost and cash flow implications before you commit.