Non-operating expenses: Definition, examples, and why they matter

Businesses often encounter costs that don’t tie directly to their day-to-day operations. In accounting, these costs are known as non-operating expenses.

Even though they’re unrelated to normal business activities, it’s still important to account for non-operating expenses in your company’s financial statements to give you and your stakeholders a clear picture of your company’s financial performance.

In this article, we’ll further distinguish non-operating expenses from operating expenses (OpEx), explain how to properly report them, and outline some tools business owners can use to track them successfully.

What are non-operating business expenses?

Non-operating expenses are costs, expenditures, or purchases that aren’t related to your core business operations. However, it’s important to recognize that an expense may be classified as a non-operating expense for one company and an operating expense for another. The key distinction is whether the expense generates revenue for the business.

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 they generate revenue, an expense associated with buying or selling property would be an operating expense.

For almost any other business—a restaurant, a publishing company, a furniture store—real estate losses would be classified as non-operating expenses because most companies aren’t in the business of buying and selling real estate.

Common examples of non-operating expenses

Common types of non-operating expenses include:

• Losses on investments: Many businesses have investments in other ventures or financial instruments. Losses on these investments would be considered non-operating expenses.
• Interest payments on debts: Interest fees on loans, mortgages, business credit cards, and so on
• Restructuring costs: Costs associated with organizational restructuring to improve efficiency or competitiveness
• Relocation costs: Expenses tied to moving your business operations from one location to another
• Inventory write-offs: Losses associated with writing down the value of unsalable product are considered operating expenses
• Foreign exchange fees and currency fluctuation: If your business holds foreign currency and the exchange rate decreases, it could result in a non-operating loss
• Costs from natural disasters: Any losses or recovery costs that result from a natural disaster would be recorded as non-operating expenses
• Uncommon legal fees or lawsuit settlement costs: While everyday fees for legal counsel are considered operating expenses, the cost of a one-time settlement would be a non-operating expense
• Changes in accounting method: Changing your business’s accounting methods can sometimes create non-operating losses due to changes in the recorded value of assets or liabilities

Non-operating expenses vs. other types of business expenses

Operating expenses vs. non-operating expenses

Operating expenses are costs that a business incurs to remain functional. These are recurring, everyday costs associated with a business’s operating activities, including rent, payroll, utilities, depreciation, and taxes.

In contrast, non-operating business expenses result from non-operating activities that are unrelated to the business’s day-to-day operations. Here are the key differences between the two at a glance:

Capital expenditures vs. non-operating expenses

Capital expenditures (CapEx) are the costs associated with acquiring, upgrading, or maintaining assets such as property, equipment, or intellectual property (IP). While capital expenses usually don’t have an immediate impact on day-to-day operations, they’re significantly different from non-operating expenses for a couple reasons.

First, capital expenses like IP, copyrights, and patents are often related to core operating activities and could help generate revenue in the long term. Second, capital expenditures are documented as assets on your balance sheet, while non-operating expenses are recorded on your income statement.

How to record non-operating expenses on your income statement

Non-operating expenses are reported on your company’s income statement just after revenue, cost of goods sold (COGS), and operating net income. Sometimes this section is labeled “Other income and expenses.” Here’s an example:

Why it’s important to track non-operating expenses

It’s important to correctly classify non-operating expenses for accurate financial analysis. Here’s why:

Helps you better understand your financial performance

Even though non-operating expenses are incidental to a business’s primary revenue-generating activities, 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 fall into each bucket, you can better understand your financial health.

Provides additional data for forecasting and budgeting

Forecasting isn’t an exact science, so the more information you have, the better. By splitting out operational activities from non-operating activities in your financial reports, you can get more accurate forecasts of actual business performance and estimate how incidental costs and revenues from non-operating activities will impact your overall profitability.

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 non-operating activities will affect net income. This can help you determine whether you have the capital to expand your product line, afford a new business location, and other strategic investments.

Get full visibility into non-operating expenses with Ramp

Ramp’s all-in-one expense management software automatically categorizes your expenses so you can see in real time how your costs break down between CapEx, OpEx, and non-operating expenses. Identify trends, find opportunities to reduce costs, and get a complete picture of your financial data for more accurate budgeting.

Our platform integrates with leading accounting solutions like QuickBooks, NetSuite, and Sage Intacct, eliminating manual errors and speeding up your monthly close. Try an interactive demo and see for yourself why Ramp users save an average of 5% a year.