Operating Vs. Non-Operating Expenses
Running a business, an entrepreneur should be aware of the nature of expenditures they incur, in order be able to evaluate their business financials in an informed manner. Financials, particularly your profit and loss statement is simply not all about just incomes vs. expenses. One needs to know what is operational in nature, i.e. related to the regular business and what isn’t. In this article, we shall be educating on the difference between operating and non-operating expenses
You first up need to ask the following question, in order to categorize such expenses:
Is this expense incurred in course of day to day or routine commercial activities of the business?
Expenses routine for one business or industry may not be the same for another business or industry. Such expenses however cannot be related to the production or procurement process, as expenses pertaining to production or procurement shall be part of your cost of goods sold. Operating expenses are also known as non-manufacturing expenses for general understanding. To put it simply, examples of operating expenses include:
- Payroll (excludes production labour costs)
- Transportation or Travel
- Lease & Rentals
- Sales & Marketing
- General office administration
- Legal & Professional fees
- Research etc.
As you would correlate by now, these expenses are essential for business continuation, and are of recurring nature apart from the cost of direct labour or raw material required for production process. Furthermore, they are crucial for analysing organisation’s overall performance. Consequently, it provides clear understanding of organisation’s cost and sales ratios.
So now let’s take a look at what non-operating expenses are all about. Contrary to operating expenses, these are not related to core activities of the business. It includes one time (e.g. restructuring charges), odd nature costs (e.g. obsolete inventory charges) and recurring expenses like bank interest, cost of currency exchange etc. to arrive at the end earning figure, which is also helpful for potential stakeholders or investors to derive decisions of investment in a particular business.
Depending on nature of business, an organisation may incur several types of non-operating expenses. Let’s look at some usual examples of non-operating expenses:
- Interest expenses
- Loss on disposition of assets
- Lawsuit settlement expenses
- Write-off of intangible assets
- Discount on the issuance of shares and debentures
- Derivatives expense (or cost of currency exchange)
- Obsolete inventory charges
In a nut shell, costs which are directly related to core activities are not part of non- operating expenses. With non-operating expenses identified differentially on an organisation’s financial statements, one can review the impact of such expenses on the business core activities. Demarcation of non-operating expenses prove useful in analysing the performance of a company and also help to forecast its potential earnings.
Nevertheless, detailed analysis of non-operating expenses helps management to reduce non-regulated expenses, and perhaps that leads any management on better control over its cost.
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