A non-operating expense is a cost that, although related to a business, is not associated with the primary objectives the business has. It can be for either a material or service, and often is targeted for cuts before core operating expenses when a business is experiencing financial difficulty, simply because cutting core operating expenses has such a drastic impact on the ability of the company to keep quality and output high.
One of the most common reasons accountants pay such close attention to each non-operating expense is because, despite the fact operating and non-operating expenses are technically distinct in a business budget, a person must evaluate both types of expenses to get a truly accurate picture of the company’s financial situation. For instance, suppose a company produced “Product X.” If the company’s income from the “Product X” sales exceeded what it cost to make “Product X,” then the company would appear to be in good financial shape. At this point, the business has yet to handle all the non-operating expenses it has, however. If these expenses are high enough, the company actually can end up “in the red,” having debt.
As examples, common non-business expenses include interest the company has to pay on loans, loss on the sale of company properties including securities, restructuring costs and currency exchange fees as non-operating expenses. Insurance also is considered a non-operating expense, as is maintenance and contributions to employee benefits. Another common non-operating expense is cleaning.
It is critical to understand that what is a non-operating expense in one company is not necessarily a non-operating expense in another business. When looking at non-operating expenses, accountants always have to look at the expense under the lens of the company objectives. For instance, if a company had the goal of producing cars, then supplies such as company phones would be non-operating expenses, not operating expenses, because phones do not directly tie into the supplies or production line for the vehicles. If the company had the objective of procuring donations via phone solicitation, however, then the company phones could be considered an operating expense.
As with operating expenses, companies have to keep track of their non-operating expenses to establish and stick to a workable budget. Finance departments typically try to cut from non-operating expenses before they move on to lowering operating expenses. Doing this does not necessarily make employees happy, such as if the company cuts employee benefits. It does not impact the ability of the business to produce a good, high quality item or service, however — 10 employees without benefits can produce “Product X” with or without benefits, for example, as long as they have adequate supplies and knowledge. As a result, the consumer often is not aware of cuts until the budget axe reaches core operations.