You’re going over your expenses for your startup's first full accounting period. Of course, the spending is high – you just started. Then you notice there are two categories of expenses.
Non-operating and operating.
Technically, all expenses are operating, right?
Not all expenses are created equal, and lumping them together can lead to confusion and missteps. The difference impacts tracking your startup’s performance, budget alignment, and future forecasting.
Fully grasping where non-operating expenses lie and separating both categories will help you view your finances accurately. However, many different facets of your startup’s finances exist. Working with a professional –and reading this article– puts you at an advantage.
This article will explore the concept of non-operating expenses and how they differ from operating expenses. We will also provide examples and explain why separating them is crucial when gauging the health of your startup.
What are Non-Operating Expenses?
Non-operating expenses are not directly related to the company's core operations. They are often considered one-time or infrequent expenses, including interest payments, income taxes, and gains or losses from investments or divestitures.
Because these expenses are not recurring, you may pay less attention to how they affect your company's bottom line. However, a series of unrelated one-time expenses can be just as damaging to your startup's savings as your monthly operating expenses.
Operating Expenses vs. Non-Operating Expenses
Operating expenses, also called OpEx or operating costs, are directly related to your company's core operations. Examples include wages, rent, and utilities – any (typically) reoccurring expense necessary for the business's day-to-day function.
Finding Non-Operating Expenses on an Income Statement
To find non-operating expenses on your financial statements, look near the bottom of the income statement. Many businesses separate the two types of expenses when reporting.
If this is the case for you, non-operating expenses should be listed after operating expenses. They will usually be marked "other income and expenses" or "non-operating income and expenses."
Examples of Non-Operating Expenses
- Interest payments will occur any time your startup borrows money. While interest payments on debt can become a recurring and constant reality for many startups, they aren’t part of your OpEx.
- Income taxes. While most taxes, such as property or employee payroll taxes, are operating expenses, taxes on income are not.
- Losses from investments or divestitures create expenses if your startup loses money through an unsuccessful investment or divestiture.
- Gains from investments or divestitures also count as expenses if you are making money on an investment or divestiture.
- Foreign exchange gains or losses are expenses incurred if your company does business in foreign currencies. For example, you might purchase materials and sell manufactured products abroad. In this case, a change in the foreign exchange rate in the time between the purchase and sale can result in a profit loss
- Other non-operating expenses include legal settlements, insurance claims, paying an outside contractor to help with company restructuring, and other one-time or infrequent expenses.
Why Do I Need To Separate Out Non-Operating Expenses?
Separating both types of expenses lets you get a more accurate picture of your company's financial performance. Without separating non-operating costs, it can be challenging to identify trends or patterns in business performance per accounting period or for forecasting.
How Non-Operating Expenses Affect a Startup's Financials
- Impact Profitability – For example, high-interest payments can eat into a company's profits, while losses from investments or divestitures decrease profits.
- Affect Cash flow – If your company needs to spend a lot of money on restructuring, this can drain cash reserves and result in a negative cash flow. Likewise, gains from investments or divestitures can increase cash flow.
- Overall financial health – Spending significant funds on expenses that do not directly contribute to your company’s profits will weaken your financial stability. In the same way, finding ways to save on non-operating expenses, like refinancing to lower an interest rate, can bolster your financial health.
Strategies for Managing Non-Operating Expenses
As a startup founder, it's essential to understand the different types of non-operating expenses and have strategies to manage them. You don't want your boat to sink before it's left the harbor.
Here are a few key strategies to consider:
- Minimizing interest expenses through effective debt management – Interest can be a significant non-operating expense for startups. It's essential to have a solid debt management strategy in place to try and keep interest payments as low as possible. This process could include seeking out low-interest loans, negotiating better terms with lenders, or even exploring alternative forms of financing.
- Maximizing tax deductions and credits – Taxes can always be a large expense. And for startups, any money saved on taxes can directly translate into money back into the business. To lower startup taxes, take advantage of any tax deductions and credits available. Research and claim deductions for development expenses, employee benefits, and home office expenses.
- Managing foreign exchange risk – If you operate in multiple countries or deal in multiple currencies, foreign exchange fluctuations can be a major non-operating expense. To deal with this risk, devise a solid foreign exchange risk management strategy. A good plan could include hedging currency exposures, seeking out currency-hedged investments, and working with a financial advisor to create a customized approach.
- Carefully Evaluating and Managing Investments and Divestitures – Another key non-operating expense is gains or losses from investments or divestitures. You must carefully evaluate and manage any investments or divestitures your startup makes. Research potential investments, diversify your portfolio, and work with professional financial experts to craft a solid, low-risk, customized investment plan.
Mastering Your Startup Expenses
As a startup founder, it's essential to thoroughly understand your company's expenses. By separating non-operating expenses and understanding how they affect your startup's financials, you can make more informed decisions and better manage your company's finances.
However, it's necessary to remember that managing non-operating expenses can be complex and requires a certain level of expertise.
For this reason, it's always a good idea to seek professional advice when managing your startup's non-operating expenses. Advanced business accounting software and an expert finance team can streamline your financial operations so you can focus attention on on other aspects of the business.
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