Operating expenses formula: How SaaS companies calculate costs

Despite economic headwinds, SaaS companies achieved a median Annual Recurring Revenue (ARR) growth rate of 26% in 2023. This data highlights the importance of managing operating expenses (OpEx) to sustain this growth.

This article breaks down the operating expenses formula. We provide a clear guide for SaaS companies to track, analyze, and optimize their OpEx.

You'll also learn:

• Key operating expense categories for SaaS businesses
• A step-by-step guide to calculating your total OpEx
• How to analyze expense trends for better budgeting
• Real-world examples of SaaS operating expenses
• How usage-based billing can help manage and optimize OpEx

Let’s begin by explaining what operating expenses are. 

What are operating expenses?

Operating expenses are all the costs involved in running your SaaS business, aside from the direct costs of delivering your software, known as the cost of goods sold (COGS).

In SaaS, OpEx includes activities like customer support, marketing, sales, and general administration — all the essential functions to keep your business running day-to-day.

But how do you find these operating expenses lurking in your financial statements? And how can you use the OpEx formula to make sense of them? We'll get to that shortly, but first, let's break down the types of OpEx you might encounter in SaaS:

• Marketing and sales: Promoting your software, generating leads, closing deals — it all adds up. This category includes costs like online advertising, content marketing, sales salaries, and commissions.
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• Research and development: This isn't just about building new features. It also covers the costs of improving existing ones and exploring new technologies. Most importantly, it also includes conducting customer research to stay ahead of the curve.
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• General and administrative: Keeping the lights on falls under this category. Think rent, administrative salaries, insurance, office supplies, and all those other integral costs.

We’ll analyze these in more detail once we’ve shared the operating expenses formula. 

Why track these costs? 

Because knowing where your money is going is the first step to managing it effectively. By understanding your OpEx, you can make better decisions about pricing, hiring, and future investments. 

Plus, keeping your operating costs in check can free up valuable resources to fuel growth and innovation.

Are operating expenses the same as capital expenses?

No, they are not. Capital expenses (CapEx) are investments in assets that will benefit your business for the long haul. These expenses include major software upgrades, new hardware, or even an acquisition of another company. 

In short, think of CapEx as buying the tools, and OpEx is the cost of using them.

Key financial metrics for SaaS companies

To accurately calculate and understand operating expenses, it’s important to distinguish between key financial metrics:

• Total revenue: This figure is the total income generated from subscriptions, licenses, and other sources; like professional services (such as implementation fees), training, and usage-based fees.
  
  It may also include revenue from partnerships, affiliate programs, or ancillary products.
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• Gross profit: Gross Profit shows how efficiently your company produces its product, calculated by subtracting COGS from Total Revenue.
  
  ‍Formula: Gross Profit = Total Revenue - COGS

• Operating profit: Operating Profit, also known as EBIT (Earnings Before Interest and Taxes), accounts for all operational costs, including OpEx, and reflects profitability from regular business activities.
  
  ‍Formula: Operating Profit = Gross Profit - Operating Expenses

These metrics help SaaS companies track costs, profitability, and operational efficiency at different levels.

How the operating expenses formula works

Calculating your operating expenses (OpEx) usually involves summing all non-COGS expenses, which provides a clear picture of day-to-day operational costs. The formula would be:

Operating Expenses = Sum of all non-COGS expenses

How to find operating expenses

Calculating your operating expenses involves either summing all non-COGS expenses directly or using the formulas introduced above to examine OpEx relative to revenue.

Now, let's take a quick look at some common expenses that contribute to your overall OpEx in the SaaS world. We'll explore these in more detail in the next section, but for now, just keep these general categories in mind:

• Hosting and infrastructure
• Customer support
• Software and tools
• Payment processing fees

Of course, don't forget those core operational costs we discussed earlier. Think marketing and sales, research and development, and general and administrative expenses. All of these play a vital role in your overall OpEx.

In the next section, we'll dive deeper into each of these expense categories and provide specific examples. 

Types of operating expenses for SaaS companies

Now, we’ll break down those operating expenses even further. You might recognize some of these from our previous discussions, but now it's time to get up close and personal with each one:

Personnel costs

Your people are your most valuable asset. Personnel costs encompass everything you spend on your team, including:

• Salaries and wages: Consider this the foundation of employee compensation. It covers payments to developers, designers, marketers, and customer support specialists.
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• Benefits: Attracting and retaining top talent often means offering competitive benefits packages. These packages can include health insurance, retirement plans, paid time off, and other perks.
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• Contractor fees: Sometimes, a company needs specialized skills on a project-by-project basis. Contractor fees cover payments to freelancers, consultants, and agencies.

Technology costs

Technology costs are essential for building, delivering, and maintaining your software. Key components include:

• Software: This one covers the cost of any software your team uses to perform their jobs. Think development tools and design software, project management platforms, and communication tools.
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• Data storage: Securely storing and managing customer data is mission-critical for SaaS companies. This category includes costs for cloud storage services, databases, and data backup solutions.
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• Cloud hosting: Keeping your software accessible and performing smoothly requires reliable hosting. Factor in costs for cloud servers, bandwidth, and network infrastructure.

Sales and marketing expenses

Getting your software in front of customers and converting them into subscribers is the primary goal of sales and marketing. Typical sales and marketing expenses include:

• Campaigns: Running targeted advertising campaigns requires spending across various channels. Think online advertising, social media marketing, and email marketing.
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• Lead generation: Attracting potential customers involves investments in activities and tools. Think content marketing, search engine optimization (SEO), and lead nurturing campaigns.
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• Branding: Creating a strong brand identity helps a company resonate with its target audience. Associated costs include those for logo design, website development, and brand collateral.

General and administrative expenses

Every business has vital, behind-the-scenes costs. General and administrative expenses cover the nuts and bolts of running your SaaS company, including:

• Office space: Whether a company has a physical office or a virtual one, there are costs associated with providing a workspace for the team. These costs include rent, utilities, and office maintenance.
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• Legal fees: Protecting intellectual property, navigating contracts, and compliance are crucial in SaaS. Include costs for lawyers, legal advice, and legal documentation.
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• Accounting: Keeping financial records in order and managing taxes is crucial for any business. This point includes costs for accountants, bookkeeping software, and tax preparation services.

Customer support and success

Customer support costs focus on providing excellent service and helping customers get the most out of the solution. Let’s look a little closer:

• Helpdesk software: Providing a platform for customers to submit support tickets, track issues, and find answers to their questions is crucial for most SaaS businesses.
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• Customer success teams: Investing in dedicated teams to onboard new customers, provide ongoing support, and help them achieve their desired outcomes with the software can be a key differentiator.

Step-by-step guide to calculating operating expenses

This step-by-step guide provides a clear framework for calculating and analyzing these costs. Let’s begin with the first step:

Step 1: List all expense categories relevant to your SaaS business

Start by identifying all the areas where your business incurs expenses. Think back to the categories we discussed earlier:

• Personnel costs: Salaries, wages, benefits, contractor fees
• Technology costs: Software, data storage, cloud hosting
• Sales and marketing: Campaigns, lead generation, branding
• General and administrative: Office space, legal fees, accounting
• Customer support and success: Helpdesk software, customer success teams

Don't forget to include any other expense categories specific to your business. For example, if you offer in-person training or have a dedicated customer onboarding team, be sure to factor in those costs as well.

Step 2: Gather financial data on each category

Now, it's time to gather your financial data. Remember that accuracy is key. Here are a few tips on where to find reliable information:

• Accounting software: If you use an accounting tool, you can generate reports that categorize your expenses.
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• Bank statements: Your bank statements provide a detailed record of all your transactions. Thanks to them, it's easy to identify and categorize expenses.
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• Invoices and receipts: Keep all your invoices and receipts organized so you can easily track and verify your expenses.
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• Payroll records: Your payroll records will show all your salary and wage expenses, as well as any associated benefits costs.

Step 3: Use the operating expenses formula

Once you have all your expense data organized, it's time to apply the operating expenses formula. You can find your total revenue and operating profit on your income statement. If you don't have an income statement, you can create one using your financial data.

Step 4: Analyze trends in expenses over time for budgeting

Calculating your operating expenses is an ongoing process. It can help you spot trends, make informed budgeting decisions, and improve your financial performance.

By tracking your expenses over time, you can see where your money is going and spot areas where you can cut costs or invest more strategically.

Example calculation for SaaS operating expenses

Let’s make this clearer with a real-world example. Imagine we have a thriving enterprise-level SaaS company called CloudBoost. They provide a complete project management platform for large teams and have a solid track record of success. 

Here’s a look at their annual financials:

• Total Revenue: $20,000,000
• COGS: $2,000,000
• Operating Profit: $6,000,000

Now, let’s take a look at the steps you need to take to calculate OpEx: 

Step 1: Calculate Gross Profit

First, let’s determine Gross Profit, which helps us understand how efficiently CloudBoost generates revenue from its core offerings. The formula would look like this:

Gross Profit = $20,000,000 - $2,000,000 = $18,000,000

Step 2: Calculate Operating Expenses

Now, we’ll calculate OpEx. In this example, we’ll show an approach that involves summing up all non-COGS expenses.

CloudBoost’s OpEx can be broken down into several key categories, including personnel, technology, sales and marketing, general administrative, and customer support costs. Here’s the breakdown:

• Personnel costs: $6,000,000 — This includes salaries, benefits, and, in some cases, non-cash expenses like stock options for their team, covering developers, engineers, designers, sales reps, marketers, customer support, and administrative staff.
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• Technology costs: $3,500,000 — This includes cloud hosting services, data storage, security measures, and software licenses.
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• Sales and marketing: $2,500,000 — CloudBoost allocates these funds for online advertising, content marketing, and maintaining a dedicated sales team.
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• General and administrative: $1,000,000 — This includes costs for office space, accounting, and insurance.
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• Customer support and success: $1,000,000 — Includes a dedicated support team, helpdesk software, and customer success programs.

Adding these together, we’d get:

Operating Expenses = $6,000,000 + $3,500,000 + $2,500,000 + $1,000,000 + $1,000,000= $14,000,000

So, using this approach, CloudBoost’s total operating expenses for the year are $14,000,000.

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Usage-based billing with Orb helps manage operating expenses

We've shared the operating expenses formula and highlighted its importance for SaaS companies.

Now, let's explore how Orb, the done-for-you billing platform trusted by companies like Perplexity and Vercel, can help you manage and optimize those expenses.

Orb's usage-based billing capabilities empower you to:

• Align costs with customer usage: Orb enables you to track customer usage with precision and bill them. You only incur costs when users use your solution, ensuring that your expenses correlate with revenue generation.
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• Gain real-time insights: Orb's real-time reporting provides info about usage and revenue trends. Orb allows for accurate expense forecasting, proactive planning, and informed decision-making.
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• Integrate with existing systems: Orb integrates with popular accounting and financial tools. We make expense tracking and reconciliation effortless. Orb eliminates manual data entry, reduces errors, and saves valuable time.
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• Optimize spending with granular usage data: Orb's granular usage data helps you identify areas of high and low consumption. Orb lets you allocate resources to support high-value features. You can also adjust pricing for low-usage segments.
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• Keep customers happy: Orb's invoices reflect actual usage and foster trust with your customers. This advantage can lead to less churn and improved customer lifetime value.

Ready to take control of your SaaS billing and understand your operating expenses? Give Orb a try and experience the benefits firsthand. Explore our flexible pricing options designed for every stage of growth.