Not all expenses are created equal in financial reporting. Some reflect how smoothly a business runs its daily operations, while others provide behind-the-scenes clues into where it stutters.

While non-operating expenses often get buried on the income statement, it’s worth taking a closer look. These expenses can provide a more accurate picture of a company’s financial health, especially for businesses with uneven income streams or mixed financing structures.

Because non-operating expenses can shape income statements, influence key financial ratios, and ultimately impact stakeholder trust, it’s crucial to properly understand and account for them. Otherwise, these expenses can erroneously cause a well-performing company to look weak, or a faltering business operation to appear stronger than it actually is.

In this guide, you'll learn more about non-operating expenses, how to recognize and report them, and why they deserve your attention.

Table of Contents

• What are non-operating expenses?
• What’s the difference between non-operating and operating expenses?
• Why non-operating expenses matter
• Where to find non-operating expenses on income statements
• Types of non-operating expenses
• How to mitigate non-operating expenses
• Example of a non-operating expense
• Navigating non-operating expenses with confidence
• FAQ

What are non-operating expenses?

Non-operating expenses are costs that are unrelated to day-to-day business operations or to the sale of a product or service. They include costs such as interest expenses, foreign currency fluctuations, or one-time losses due to lawsuit settlements or the sale of assets. Essentially, they reflect the consequences of a company's financing and investing decisions.

What’s the difference between non-operating and operating expenses?

Operating expenses include everyday operational costs such as staff salaries, rent, inventory, or research and development. The key difference between the two is that operating expenses must be incurred for a business to generate revenue. Non-operating expenses aren’t relevant to the company’s core operations.

Examples of non-operating expenses

Below are some of the most common examples of non-operating costs that can materially affect a business's net income:

Interest expense: This is the cost affiliated with paying off a loan or credit line, bond, or lease. It's an expense that’s attached to financing, not to operations.

Foreign exchange losses: If your business deals with global sales or supply chains, any fluctuations in currency exchanges can affect earnings.

Disposal of assets at a loss: Whether it's selling equipment or shutting down an entire business segment, losses here will be reflected in the bottom line.

Settlements or fines from lawsuits: Any penalties or legal or regulatory settlements that are not part of ongoing business operations will be designated as a non-operating expense.

Reorganization costs: Severance pay, moving expenses, and other costs of making major business changes are non-operating expenses.

Losses from natural disasters: An earthquake, flood, or other type of natural disaster may causes losses to a business that are considered one-time, non-operating expenses.

Why non-operating expenses matter

Even though non-operating expenses don’t directly affect earnings before interest, taxes, depreciation, and amortization (EBITDA), it’s important to review them as they could be symptoms of deeper financial problems within the company.

Rising interest expenses could be a red flag for rising debt levels. Multiple asset write-offs can reflect poor investment decisions. And a surprise loss can reveal an exposure that wasn’t hedged properly.

Let’s say a medium-sized business reports $4M EBIT and $800K of interest expense on its income statement. That non-operating expense will bring pre-tax income down to $3.2M, representing a 20% bite just from borrowing. Depending on interest rates, this could worsen over time.

Conversely, a decrease in non-operating costs can free up cash flow. It can include better financing, less debt, or fewer one-off expenses. This has tangible implications for dividends, reinvestment, and long-term strategy.

For mid-market businesses with tight budgets where any variability in cost structure could instantly compress profit margins, monitoring these expenses regularly is essential.

Where to find non-operating expenses on income statements

Non-operating expenses will usually appear below operating income and after operating expenses, near the bottom of the income statement. The line item "Other Income (Expense)" will usually roll them up, although they are sometimes broken out in footnotes or buried in catch-all lines.

When items like "other expenses" show large fluctuations, this may be a red flag for volatile or recurring non-operating expenses.

Here is a general structure of the line items on an income statement:

Revenue

(-)

Cost of goods sold

=

Gross profit

(-)

Operating expenses

=

Operating income (EBIT)

(-)

Non-operating expenses

=

Income before tax

(-)

Income tax expense

=

Net income

Types of non-operating expenses

Not all non-operating expenses are immediately recognizable. Here are some important considerations.

Recurring versus one-time charges

While some non-operating expenses are one-offs, other charges occur on repeat. It’s important to recognize the difference: the expense of settling a lawsuit is very different from having to pay repeated interest on a revolving line of credit.

Any recurring non-operating expense should be included in forecasting models, while one-time charges must be reviewed separately — especially if they are labelled as non-recurring but continue to recur.

Cash vs. non-cash items

Not all non-operating expenses affect cash flow. For example, while a goodwill impairment charge hurts net income, it’s not considered an outflow — unlike interest payments, which will reduce available cash.

This matters when forecasting free cash flow and debt repayment. For a true measure of the company’s performance, there should be a clear distinction between accounting charges and true cash costs.

Time-sensitive transactions

Certain non-operating expenses, such as currency losses, are time-sensitive — they may spike in one period and correct themselves in the next. One-time transactions such as asset sales can also distort earnings in the short term.

For a clearer picture, it’s important to analyze results over multiple periods. Looking at trailing twelve months (TTM) data can help smooth out these fluctuations and reveal underlying financial trends.

Industry-specific differences

Some industries have more non-operating expenses than others. You’ll notice higher interest expenses in industry segments that are heavy in capital, like manufacturing or property, while tech firms are more likely to report investment-related gains or losses.

Comparing your business to industry peers can provide useful context. If your company’s non-operating expenses are increasing while competitors remain stable, it may be a signal of a deeper underlying issue worth examining further.

How to mitigate non-operating expenses

Some types of expenses are contractual or fixed, but there may be room to manage other types of non-operating expenses. Consider the following strategies.

Manage debt

Reducing interest costs often begins with re-evaluating debt structure. Can short-term debt be converted to long-term? Is refinancing possible at a lower rate? Could a more favourable loan covenant package be negotiated?

Even a small reduction in interest rates can make a big difference, especially when the debt being carried is in the eight- or nine-figure range.

Reduce currency volatility

While swings in currency rates may seem negligible during stable periods, a single sharp devaluation can have ripple effects on financial performance for an entire fiscal year.

Foreign exchange exposure is inevitable for businesses with global operations, but it doesn’t have to be unmanageable. Tools like forward contracts, currency options, and natural hedging strategies can help mitigate risk. Aligning revenues and expenses in the same currency is another effective tactic.

Review your assets

Selling underperforming or idle assets is sometimes unavoidable. Regular impairment testing, monitoring market values, and conducting internal reviews can help optimize the timing and minimize losses as well as unexpected write-downs.

Use non-operating items strategically

Some non-operating expenses can serve a strategic purpose. A company might accept a short-term loss from restructuring to unlock long-term gains, or invest in a costly hedge to limit future risk exposure.

It comes down to smart trade-offs. Evaluate non-operating expenses as not just individual transactions but within the broader context of capital allocation and long-term value creation.

Approach acquisitions with transparency

Acquisitions usually trigger non-operating expenses, including legal fees, interest charges, and integration expenses. While temporary, they can obscure company earnings for several quarters. Proactively forecasting and disclosing them helps manage expectations and avoid surprises.

Example of a non-operating expense

Consider the following scenario: For the fiscal year ended December 31, 2024, Holden Trailers, a mid-sized manufacturer of farm equipment, reported operating income of $275 million on its income statement.

This figure was calculated after deducting total operating expenses, including depreciation as well as research and development, from its net sales. The company also reported $45 million in interest expenses due to long-term debts and $5 million in investment income.

Therefore, its net non-operating expense was $40 million ($45 million - $5 million). This amount was subtracted from its operating income to arrive at earnings before taxes of $235 million.

Navigating non-operating expenses with confidence

Understanding and managing non-operating expenses is critical to maintaining a clear view of your business’s financial health. These behind-the-scenes costs can distort your income statement and investor perceptions if they’re not properly tracked.

Whether you’re growing a mid-sized company or managing tight margins, regularly reviewing non-operating expenses allows you to make smarter financial decisions and spot red flags early. QuickBooks Online Advanced offers financial tools that help you build a more resilient business. Start simplifying your financial reporting today.