Running a small business requires consistent monitoring of day-to-day operations. Understandably, the business owner maintains a strong focus on revenue generation. The owner also keeps an eye on the expenses related to bringing in that income. The term “operating expenses” applies to these business operations costs.
However, “non-operating expenses” also factor into the company’s bottom line. Because these costs don’t figure into the company’s operating profit, it’s easy to overlook them.
It’s important to integrate non-operating expenses into the business’ accounting framework and financial statements. Then, the owner can obtain a more accurate picture of the company’s financial health.
What are non-operating expenses?
Non-operating expenses are costs that don’t directly pertain to the company’s core business operations. Monthly expenses such as debt interest payments are considered non-operating expenses. In addition, one-time costs such as currency exchange expenses and fire damage cleanup are non-operating expenses.
Examples of non-operating expenses
Businesses in different industries may vary in their types of non-operating expenses. A company’s size and type may also factor into the equation. With that said, certain types of non-operating expenses are common to many businesses.
These are examples of non-operating expenses:
- Business Relocation Expenses
- Business Restructuring Expenses
- Depreciation Expenses
- Expenses from Lawsuit Settlements
- Expenses from Weather Damage
- Fire Damage Expenses
- Interest Expense (or Interest Payments)
- Inventory or Receivables Write-Downs
- Investment Losses
- Losses on Sale of Assets
- Obsolete Inventory Charges
- Preliminary Expenses Amortization
- Write-Offs of Intangible Assets
How do non-operating expenses differ from operating expenses?
Operating expenses (or operating costs) are those costs incurred in the course of everyday business activities. Rent, utilities, building repairs and maintenance, and office supplies are examples of costs related to operating activities. In the case of an income-producing property, for example, real estate taxes would classify as an operating expense. Bookkeeping entries should reflect this expense.
A company’s income statement will take operating expenses into account when measuring the business’ profitability. The business’ earnings before calculated interest and taxes (EBIT) also help to indicate the firm’s profitability. The income statement will also incorporate the company’s operating revenues.
On the business’ profit and loss statement, operating expenses appear directly beneath the Cost of Goods Sold (or COGS). The result is the gross profit on the company’s sales (or revenues)
In contrast, non-operating expenses aren’t directly connected to regular business operations. Rather, these costs relate to peripheral business activities, and may only be one-time costs. These expenses should be taken into account along with non-operating income.
Both types of expenses can be fixed, which means they’re not affected by production volume or service delivery alterations. Or, operating expenses and non-operating expenses can vary according to production or service delivery fluctuations.
What are some benefits of recording non-operating expenses?
A business should consider its non-operating expenses for a given period. Expense management and transparency are major underlying factors here.
- A company’s accountant should show operating expenses and non-operating expenses separately in the firm’s income statement. The result enables financial analysts to better gauge the core business operations’ performance for a specific period of time.
- It’s fairly easy to reduce a company’s non-operating expenses, as they don’t have a direct relationship to the company’s core business operations. In contrast, cutting down on operations-related expenses is considerably more difficult.
- Consistent disclosure of a business’ non-operating expenses signals the company’s willingness to be transparent about its operations. Internal partners (such as employees) and external partners (such as investors) will look favorably on this transparency.
Do non-operating expenses have any potential risks?
Factoring non-operating expenses into company financial statements has three potential downsides. The business owner should discuss these issues with the company’s Certified Public Accountant (CPA) before moving forward.
- There aren’t any well-defined criteria for separating operating expenses from non-operating expenses. This can lead to confusion and accounting misapplications.
- One company can regard a specific expense as a non-operating expense. Another company may consider the same cost an operating expense.
- Accountants can rename an operating expense as a non-operating expense. This would help to increase the net income from the core business operations. Generally accepted accounting principles (or GAAP) should provide guidance in this situation.
How to calculate non-operating expenses on your income statement
A company’s income statement (also called a profit and loss statement) reports the amount of revenue earned during a defined time period. Generally, income statements cover one full year or some part of the year. In addition, the income statement details the expenses linked to the generated revenue.
Operations-related revenues and expenses are grouped together toward the top of the income statement. Below those operating results, you’ll find non-operations revenues and their associated costs.
By using this logical breakout, financial analysts can better state the company’s operations performance. Income statement information may be useful when determining the company’s income taxes owed.
Other relevant financial statements
The United States Security and Exchange Commission lists three other relevant financial statements. Collectively, they provide a comprehensive picture of a company’s financial situation.
It’s important to make decisions after analyzing all three statements together. Business owners should work closely with their Certified Public Accountant to make the choice that will best benefit their business.
A balance sheet provides fixed-period information regarding a company’s assets and liabilities. Next, a balance sheet also includes the Statement of Shareholders’ Equity. This statement details the rises and falls in the shareholders’ interests during a defined time period.
Cash Flow Statement
This aptly described statement shows the cash flows in and out of the business. Maintaining sufficient cash on hand is important. A company must be able to pay its ongoing expenses and obtain assets (such as equipment and supplies) as needed.
Always stay on top of your expenses
Only 40 percent of small businesses actually make a profit, states Small Biz Genius. To move in a profitable direction, business owners should understand the role of non-operating expenses in their company’s financial cycles. With that knowledge, they can better track the expenses’ impacts on the company’s short- and long-term financial performance.
If you’re looking to lower your expenses, it’s a good idea to look into your credit card processing fees. Payment processing costs businesses hundreds, if not thousands of dollars a month so cutting this expense can result in major savings.
Blog post credit: https://paymentdepot.com/blog/non-operating-expenses/
By Francesca Nicasio