Any small business owner who has spent more than a few minutes pondering over their company’s financial statements has likely wondered:
What exactly is the difference between operating and non-operating expenses?
I mean, both were necessary for the business to operate, right?
While it is true that both operating and non-operating expenses are normal parts of business operations, there is an important reason why accountants separate these two expenditures in financial statements.
In this article, we’ll discuss why.
You’ll learn about the core differences between operating expenses and non-operating expenses and get practical tips for controlling and minimizing both kinds of business spending.
What’s the difference between operating vs. non-operating expenses?
Operating expenses and non-operating expenses are two different categories that finance professionals use to separate different types of business spending.
Operating expenses are business costs that are associated with the organization's day-to-day operations. Wages are a good example of operating expenses. So are rent and utilities.
These expenses are necessary to keep the business operating. If you don’t pay your utility bills, you won’t be able to run the factory.
Non-operating expenses are basically everything else. They are expenses that are not directly connected to the day-to-day running of the business.
Interest charges are a classic example of non-operating expenses. They are still valid expenses, and you have to pay them, but they aren’t vital to keeping your business operational.
What are operating expenses?
Operating expenses are costs that a business occurs that relate to the ongoing operation of the organization. They are essential for maintaining daily activities that go into the production of the goods or services that the business sells.
Examples of operating expenses
Here are some of the common examples of business operating expenses:
- Salaries, wages, and employee benefits
- Utilities like water and electricity
- Rent and leases
- Official supplies
- Software licenses and other subscription
- Marketing and advertising costs
- Travel expenses
- Professional fees such as your accountant's bills
- Depreciation and amortization
- Insurance
- Bank fees
- Investment in training and development
- Shipping and delivery costs
- Inventory costs such as storage fees
- Cleaning services
- Security services
- Meals and entertainment
What are non-operating expenses?
Non-operating expenses are costs that a business incurs that aren’t directly tied to its core business operations.
They are typically irregular or incidental and are incurred outside of the normal course of business.
While non-operating expenses may not be directly related to core operations, they are still important outgoings that need to be paid attention to. Non-operating expenses still reduce net income and impact cash flow.
There are also some impacts on investor perception.
Non-operating expenses impact the net profit margin, reduce ROA (return on assets), and can impact debt-related ratios, which can indicate higher financial risk. Frequent or substantial non-operating expenses can also negatively impact earnings predictability.
As such, high levels of non-operating expenses can impact how investors view your business and may affect their willingness to invest.
Examples of non-operating expenses
Some common business expenses that are classified as non-operating costs include:
- Interest expenses
- Litigation costs and legal settlements
- Current exchange losses
- Losses on the sale of assets
- Restructuring costs
- Unusual or infrequent items, such as one-time expenses related to a natural disaster
- Discontinued operations
- Early retirement costs
- Losses from investments
- Environmental cleanup costs
Operating vs. non-operating expenses in financial statements
Operating and non-operating expenses are treated differently in financial statements, as they represent different aspects of an organization’s financial activities.
Operating expenses are listed on the company’s income statement. You’ll find them listed after the gross profit section.
Operating expenses reduce the operating income, which is your gross profit less operating expenses and depreciation.
Analyzing operations helps assess the efficiency of a company’s operations. When a business has high operating expenses relative to its revenue, this might indicate operational inefficiencies.
This also makes comparison between similar companies easy, as they’ll likely have similar expenses if their core operations are the same.
Non-operating expenses are also listed on the income statement. They’re found after the company’s operating profit for the period.
It’s important to have non-operating expenses listed separately, as while they do reduce a company’s overall profit, many investors wish to assess the efficiency and profitability of the business’s core operations, which they can do using the operating profit.
Capital expenditure vs. operating expenditure
Capital expenditure and operating expenditure are two categories of business spending that you’ll find on your company’s financial statements.
Operating expenditure is business spending that relates to the day-to-day operations of the business. It’s necessary for the business to produce the goods and services that it sells. Wages, rent, and office supplies are all examples of operating expenses.
Capital expenditure, on the other hand, relates to investments in the long-term growth and operation of the business. That is the purchase of capital assets.
Capital expenses are not required for the day-to-day operation of the company in the way that operational expenses are. The purchase of new machinery or the development of a new branch are examples of capital expenditure.
3 practical tips on controlling and optimizing operating expenses
Looking to reduce or optimize operating expenditure? Here are three practical tips to implement right now.
1. Improve spend visibility
Your first step in reducing and optimizing business spending is to understand what you’re paying for in the first place.
Spend and expense management platforms can help here.
By connecting all of your financial management software solutions to a centralized expense management solution, you’ll have a single view of all business outgoings.
From there, you can narrow down by spend category or department to find out where most of your operating expenses are concentrated and create personalized dashboards and automated reports to track the impact of any spend management procedures you later put in place.
2. Look for renegotiation opportunities
Business purchases are almost always up for negotiation. This is especially true when you’ve got some form of leverage, such as a history of on-time payments with a supplier.
Look for opportunities to revisit what you’re paying with suppliers, and you’ll reduce operating expenses.
For example, after running a spend analysis, you might identify that multiple departments are using different project management solutions from different suppliers.
To reduce expenditure, you might decide to consolidate software spending by having all departments use a single project management tool. By paying for more seats with a single supplier, you’ve got more leverage to negotiate a better per-user price.
3. Leverage automation
Automation is a powerful modern tool for reducing your costs by reducing the amount of manual work your team engages in.
Some classic examples of business automation in practice that can help you reduce your labor expense include:
- Purchase approval workflows
- Sales email cadences
- Purchase order and invoice matching
Automating repetitive manual tasks can free up your employees to work on more valuable strategic tasks, delivering greater value and improving your return on investment from that expense.
Optimizing non-operating expenses
Let’s now turn our attention to how to optimize and improve how your business manages non-operating expenses.
Start by optimizing your approach to debt management.
Interest on debt is one of the most common examples of non-operating expenses.
By optimizing how you manage debt through balance transfer credit cards and other forms of debt consolidation, you’ll reduce interest payments and, as a result, lower your non-operating expenses.
From there, consider selling off some non-core assets.
By reducing some of your organization’s non-core asset holdings — such as stock investments — you’ll reduce your exposure to non-operating expenses related to those assets.
Additionally, you’ll free up additional cash to pay down current debts, which will further help reduce your interest expense.
Get on top of operating and non-operating expense management
Operating expenses and non-operating expenses are two important categories of business expenditure that you’ll find on every income statement you receive from your accountant.
While the majority of the expenses your business incurs will be operating expenditures, it's important to understand the impact of both categories on profitability and investor sentiment.
Of course, it's even more important to be in control of company spending, which starts by increasing visibility.
Take charge of spend visibility today with BILL Spend & Expense, our powerful solution for managing all kinds of business expenditures.
