Operating expense ratio (OER)

Operating expenses, or OPEX, are recurring costs recognised in running the business, such as staff, rent, utilities, insurance, technology, marketing and administration. The operating expense ratio, or OER, relates a defined set of operating expenses to revenue. A lower ratio can indicate efficiency, but it can also reflect underinvestment or classification changes.

When to use it

• Answer: “How well are we managing operating expenses relative to revenue?”
• Assess this KPI within the Financial perspective.
• Govern classification, data, formula and reporting.
• Compare periods and similar businesses on a consistent basis.

This is educational information, not accounting or investment advice.

Origins

OER has no single inventor. It developed from financial-statement ratio analysis. The same abbreviation is also used for other ratios, including property and investment-fund measures, so always state the exact formula.

What it is

Perspective: Financial perspective.

Key performance question: How well are we managing our operating expenses?

OPEX differs from capital expenditure, or CAPEX, but accounting treatment depends on applicable standards and policy. Depreciation may appear in operating expense even though it reflects prior capital investment.

Dividing OPEX by sales revenue estimates how much revenue is absorbed by the selected operating costs. Falling OER while revenue grows can indicate operating leverage. It can also result from outsourcing, deferred maintenance, lower service quality or costs classified elsewhere.

How to use it

Measurement