Non-operating business expenses: why do they matter?

Non-operating expenses are costs that are not related to the core business operations of a company. These expenses arise from activities that are outside the normal, day-to-day business functions. 

‍

Non-operating business expenses can entail anything from interest payments on debts to relocation costs. These expenses are important to account for in your company’s financial statements, giving you and your stakeholders a clear picture of your organization’s financial performance. 

‍

In this article, we’ll further distinguish non-operating expenses from operating expenses, explain how to properly report them, and outline some tools that business owners have used to track them successfully. 

What are the operating and non-operating activities sections of the financial statement?

The “operating activities” section of a financial statement reports activities that are aligned with the business’s core function or primary purpose. If a business performs an activity that helps bring its products or services to market, it is considered an operating activity. Revenues and expenses generated from operating activities will be shown first on the income statement.

‍

“Non-operating activities” are things a business does that aren’t vital to its core business but still affect the company’s financial health. Typically, non-operating revenues and expenses are reported immediately following operating activities on the company’s income statement.

What are operating activities versus non-operating activities?

Before you can separate your financial information into the operating and non-operating sections of the income statement, you must first understand what operating and non-operating activities are. We’ve already introduced the general rule, which is that operating activities must be directly associated with running the business, but let’s take it one step further. Let’s look at this quick comparison chart so we can see the difference between operating activities and non-operating activities.

‍

‍

Any revenue or expense that results from these business activities can then be placed on your income statement in the corresponding section. 

What are non-operating business expenses?

Let’s dig a bit deeper into non-operating business expenses in particular. We want to know not only what they are and how they’re calculated, but also why they’re important to account for in any financial analysis.

‍

Non-operating expenses are costs, expenditures, or purchases not related to a business’s core business operations. Examples of non-operating expenses are:

• Losses on asset sales
• Interest payments on debts
• Restructuring costs
• Acquisition costs
• Relocation costs
• Inventory write-offs
• Fees associated with currency exchanges or foreign exchange fees
• Costs from natural disasters
• Uncommon legal fees or lawsuit settlement costs

‍

The important thing to keep in mind here, though, is that an expense may be classified as a non-operating expense for one company and an operating expense for another. The relevant factor is whether the expense is associated with the business’s revenue-generating purpose.

‍

Let’s consider an example. A real estate company whose primary business purpose is to buy and sell property for investment would consider a loss on the sale of real estate to be an operating expense. In other words, because buying and selling property is how it generates revenue, an expense associated with buying or selling property would be an operating expense. For almost all other businesses—a restaurant, an architecture firm, a publishing company, a furniture store—real estate losses would be classified as non-operating activities because these companies aren’t in the business of buying and selling real estate.

Where are non-operating expenses reported on the financial statements?

On your income statement, non-operating expenses are reported just after revenue, cost of goods sold, and operating net income. Sometimes this section is labeled “Other Income and Expenses.” 

‍

Why are non-operating expenses important?

It’s important to correctly classify non-operating expenses. Here’s why:

• It helps a business better understand its financial performance.
  Even though non-operating expenses are incidental to a business’s primary revenue-generating purpose, they still affect the company financially. In some cases, like in the event of a lawsuit settlement or a natural disaster, non-operating costs can completely change a business’s bottom line. If you understand what sort of costs are placed into each bucket, you can better understand how well your business is performing.
• It provides additional metrics for forecasting and budgeting.
  Forecasting isn’t an exact science, so the more information you can provide, the better. By separating out operational activities from non-operating activities, you can get accurate forecasts of actual business performance, and estimate how non-operating incidental revenues and costs will impact your overall profitability.
• It helps you grow and scale your business.
  Non-operating activities may change drastically from year to year, but if you look at overall trends, you can estimate how much of an effect non-operating activities have on net income. This will help you determine if you have the capital to invest in a new line of business, afford a new business location, etc.

Are non-operating expenses the same as indirect costs?

You may think that non-operating expenses are another term for indirect costs since non-operating expenses are indirectly related to the business purpose, but they are not in fact the same thing. First, though, consider how direct costs and indirect costs relate to each other. 

‍

Direct costs are those that a company can attribute directly to a service they provide or a product they manufacture, build, sell, etc. Indirect costs are expenses that occur during the normal course of business but are not directly associated with the product or service. 

‍

Direct and indirect costs are important to think about, especially when assessing the profitability of certain product lines within your company. But direct and indirect costs are not formal financial statement items.

Which of these are non-operating expenses?

Amortization and Depreciation

Amortization is an operating expense because the asset being amortized is used in the revenue-generating activity of the business.

Cost of Goods Sold

Cost of goods sold (COGS) is neither an operating expense nor a non-operating expense—it is its own line item. COGS are the direct costs of producing a product and could include materials, labor, storage costs, factory overhead, purchase returns and allowances, items purchased for resale, etc.

Rent and Utilities

Rent, utilities, and other overhead costs are considered operating expenses because they are necessary for a business to perform its core operations. Without these overhead costs, the business would not be able to produce its product or provide its service.

Debt Payments

Although debt payments are monthly charges, they are classified as non-operating expenses.

Track your non-operating expenses with Ramp

Ramp’s expense management software can help you automatically organize and categorize your expenses so you can maintain a clear understanding of your company’s financial health.

‍

Businesses should have a clearly outlined policy so that workers know where and how to record their expenses, but once they make it into your accounting solution, our software can take over. 

‍

Ramp’s intelligent automation features can keep those non-operating expenses separate from operating expenses so that you have the information you need to improve overall business operations.