What Is Finance Expense?
Finance expense is the cost of funding for a business. It includes the costs associated with the debt, labor, technology, and overhead of a company’s finance department. This cost should represent a small percentage of total revenue. Businesses in the consumer packaged goods, heavy manufacturing, and financial services industries typically incur greater finance expense than other industries.
Finance expense can be related to a number of factors, such as highly manual accounting processes, excessive report generation, and general inefficiencies within the finance function. For example, a high finance cost may be a sign of low-value work performed. Another cause of high finance costs is excessive staffing. A high finance expense could also be the result of a company’s failure to monitor and control its costs.
Interest expense is a common form of finance expense. It includes the costs of borrowing money for investments. While it can mean different things to different people, interest expense is typically the main financing expense on a company’s income statement and is an essential measure of profitability. It includes both interest payments on debt as well as margin interest, which is charged in taxable brokerage accounts when borrowed money is used to purchase investments.
Finance expense can also refer to any expense that a business incurs for operating activities. These expenses include compensation for employees, interest on debts, subsidies, and grants, social benefits, and other costs. The key difference between these two forms of expenses is that an expense is not necessarily a liability. It represents the consumption of an asset. A business may incur a $10,000 cash expenditure, but it will charge that expense over the asset’s life.
Expenses are recorded either by cash basis or accrual basis. The expense for a purchase on credit is recorded as a debit, while an expense for an asset is recorded as an asset. Expenses are recorded based on the accounting system that a business chooses. The accrual method records an expense when the legal obligation is complete.
Expenses can be divided into two major categories: operating expenses and non-operating expenses. Operating expenses are the costs incurred in operating a business; non-operating expenses are the costs of borrowing money. The former includes interest and other costs related to borrowing money, while the latter is a direct result of restructuring or reorganization. Other common expenses are rent, wages, and utilities.
General and administrative expenses are expenses that don’t directly affect a company’s revenue. They can also include salaries, research and development (R&D), travel, and technology expenses. Loan origination fees and interest on borrowed money can also be considered as general and administrative expenses. Another type of expense is extraordinary expenses, which are incurred for large one-time events. For example, the sale of land or disposal of a significant asset could involve significant costs.
Accounting for expenses is an essential part of a business’s income statement. Expenses are recorded on either an accrual or cash basis, and accountants record them according to the payment date. If the cash basis is used, utilities paid in May would be recorded as an expense in April. Meanwhile, accrual accounting records expenses when the legal obligation is met.