From production to sales to marketing- it takes a gold mine to fund a business. What is incredibly daunting is that these everyday expenses are still not enough to cover all the costs of managing an organisation. Some unusual expenses such as interests, loss on investments, etc., also add to the total expenses incurred by a business. These costs are known as non-operating expenses.
Non-operating expenses like losses, inventory write-downs, restructuring costs, etc., are calculated and listed separately from operating and capital expenses. Separate calculations of operating and non-operating costs give the finance officers, managers and business owners a more accurate and nuanced picture of company performance.
Also, Read: What are Operating Expenses?
What are Non-operating expenses?
Non-operating expenses are those costs of business that do not directly relate to the core business functions and so do not directly facilitate the production/sales/distribution of the main product or service. They can be both recurring and non-recurring.
For example, lawsuit settlement fees are a one-time expense, while loan interest payments are regular expenses.
An understanding of non-operating expenses is essential for businesses. Knowing how to categorise and calculate non-operating expenses helps finance officers integrate them into financial analyses.
Types of Non-operating expenses
1. Interest payments
Businesses sometimes finance their operations with the help of loans. This corporate debt incurs a particular interest amount every month. These are non-operating expenses as they do not directly contribute to the company’s overall functioning.
2. Cost of relocation
Businesses sometimes have to move all their operations from one location to another. This relocation comes with many unusual costs like transportation, relocation allowances for existing employees, recruitment costs, etc.
3. Changes in accounting methods
When there is a change in the accounting methods, certain discrepancies can arise in the company’s financial records. As a result, some unusual expenses that are not easy to account for may occur. These costs can be put in the non-operating expense category before generating the final reports.
4. Losses on investments
It is common for businesses to invest in other ventures with the purpose of wealth creation. It helps them increase their asset worth and thereafter enables them to grow their value over time with comparatively lower effort.
However, this is not always the case. Investing always comes with certain risks; sometimes, these risks are realised. The funds lost in these loss-incurring investments are a cost to the company and hence can be classified as a non-operating expense.
Suggested Read: What are Selling Expenses?
5. Inventory write-offs
Businesses keep an inventory of goods to be sold at a later date. These stored goods can suffer damage or pass their expiration date before they can be sold. Such a scenario calls for inventory write-offs.
Inventory write-offs are the practice of officially recognising that a part of the business’s inventory is obsolete, unusable and cannot produce monetary value for the company. This is treated as an expense incurred by the industry and categorised as a non-operating expense.
6. Lawsuit settlements
While legal fees are a part of compensation and come under operating expenses, certain one-time legal costs are classified as non-operating expenses.
7. Restructuring costs
Businesses may decide to restructure their operations or personnel from time to time. While crucial to the big picture, this restructuring often comes with additional costs like new salary bonuses, incentives, severance or redundancy packages for laid-off employees, etc.
While restructuring eventually influences the day-to-day operations of the company, the restructuring costs are still incurred for a short period and are classified as non-operating expenses.
8. Currency translation
Currency translation loss occurs when a company is doing business with international entities. When the host country’s currency fluctuates with respect to the home currency, costs can rise unpredictably. These added costs are then categorised as non-operating expenses.
9. Loss because of disaster
Once in a while, a naturally occurring disaster may cause irreparable damage to uninsured company property. The cost of replacement for that property becomes a loss for the company. Finance departments can categorise this unusual cost as a non-operating cost.
Quick Read: Types of Expenses in Accounting
Non-operating vs operating vs capital expenses: What are the differences?
Business expenses are classified into three categories: capital, operating, and non-operating costs. Let’s look at the critical differences between the three expense categories.
| || |
|Definition||Costs of business that are not directly related to the core business functions.||Costs that facilitate operations that contribute to the day-to-day activities of a business.||Money spent by a business to purchase, upgrade or repair a fixed asset.|
|Accounting||Non-operating expenses appear on the income statement.||Operating expenses also appear on the income statement.||You will find capital expenses on the balance sheet.|
|Function||Indirectly supporting the overall functioning of the business and ensuring its survival.||Performing operational activities.||Acquiring assets for the long-term functioning of the business.|
|Example||Lawsuit settlement costs, inventory write-offs, loss due to disasters.||Office rent, employee compensation, selling expenses.||Purchase of a new building.|
How to calculate Non-operating expenses?
Non-operating expense is a term that we use to describe costs incurred outside of the core, day-to-day functioning of a business. Companies can allot different costs as non-operating expenses on the company’s income statement.
Refer to the company income statement to determine which costs are under the non-operating expenses section. You will find non-operating expenses on the income statement below the operating expenses section.
You can add all the listed items and get the total non-operating costs incurred by your company.
Suggested Read: What are Incidental Expenses?
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Non-operating expenses examples
Let’s look at a few examples to understand how non-operating expenses work.
Example 1: Suppose company A has taken a loan of 50,000 INR. Per month, they will have to pay a certain interest on this loan. Hence, this interest is an example of non-operating expense.
Example 2: If company X buys goods to sell and stores them at a storage facility. However, they lose track of time and the goods pass the expiration date. The cost of these goods is thereafter a non-operating expense.
Significance of Non-operating expenses
Reporting non-operating expenditures has a lot of significance to finance professionals and business owners.
- It contributes to the financial reputation of the business by stating employee benefits, loans, interest, bonuses, etc.
- It increases transparency and hence helps build and strengthen trust between the current and future stakeholders
- Facilitates the creation of financial reports that are more accurate and specific which eventually supplements financial analyses that help business owners make critical decisions.
- Efficiency reporting facilitates accurate analyses of non-operating expenses which help finance officers detect unnecessary expenses and remove them.
Also, Read: Expense vs Expenditure
Where do Non-operating expenses appear on the company income statements?
Non-operating expenses appear towards the end of the income statement below the operating costs. Mostly, all non-operating expenditures are clubbed together. However, some companies differentiate between the various non-operating expenses when listing them on the income statement.
Non-operating costs commonly appear with non-operating income. Non-operating income is the income generated by a business through activities that are not the business’ primary offering. For example, the returns on business investments, gains from foreign exchanges, sales of assets, etc., are different types of non-operating income.
What is Non-operating income?
Non-operating income is the total earnings or loss coming outside of the core functions of the business. Like non-operating costs, non-operating income is also most likely to be a one or two-time occurrence.
Examples of non-operating income include interest income, writedown on assets, gains or losses from currency translations and foreign exchange, sales of assets, etc.
Non-operating income list
Non-operating income includes the following items.
- Dividend income
- Gains and losses from sales of assets
- Lawsuit losses
- Losses on uninsured assets due to calamities
- Losses or gains due to discontinued business operations
- Losses or gains from investments
Also, Read: What are SG&A Expenses?
Manage expenses with the help of Happay
Managing expenses is one of the most tricky things that businesses do. Little discrepancies and innocent mistakes in expense recording and organisation can lead to enormous losses. Thankfully, companies can automate a large chunk of their spend management processes.
There are many software in the market that can help you manage various expense procedures. Happay is a platform that serves as a one-stop solution for all spend management needs.
Whether it is petty cash, travel and expense, fleet expenses, or employee tax benefits solutions, Happay has everything. Schedule a demo with the Happay team and learn how it can help you increase your savings and optimise your spend management system.
Non-operating expenses – FAQ’s
Non-operating expenses appear on a company’s income statement below the operating expenses.
‘Non-operating’ means activities that are not directly contributing to the production, sales, facilitation etc. of a business’ main offering.
Assets that are extra assets of a business are non-operating assets. They don’t facilitate the core functions of the company. Examples of non-operating assets are marketable securities, unallocated cash, vacant land, unused equipment, and loans receivable.
Some examples of non-operating expenses are lawsuit settlements, inventory write-offs, interest on borrowed funds, etc.
No, depreciation is an operating expense. This is because the asset is a part of core business costs and operations.
Non-operating items include sales of assets, inventory write-offs, gain or loss from foreign exchange, interest income, investment income, etc.
Non-operating expenses are all business costs that do not facilitate core business operations. They can include costs like lawsuit settlement fees, interest payments, etc.