Understand and Manage Recurring vs Non-Recurring Expenses

The impact of the simple word “non” in front of recurring makes a tremendous difference in how an expense is treated — whether by accountants, approvers, budget owners, or financial analysts.

Understanding the differences between recurring and non-recurring expenses is essential for effective budgeting and planning. It’s important to distinguish between recurring and non-recurring costs, as they will appear differently on your financial statements.

What are recurring expenses?

Recurring expenses are the ongoing general and administrative operating costs that your company incurs at regular intervals. These expenses include all operating costs, whether they are direct (part of your COGS) or indirect (not tied to a specific product, service, or business activity). Administrative expenses encompass costs related to managing and running your business, such as retainers for external accounting services or legal counsel.

Recurring expenses typically follow a predictable payment pattern and are expected to remain relatively constant throughout the accounting period. They may fluctuate due to changes in business needs, supplier pricing, or switching suppliers. For instance, if you negotiate a rent reduction with your landlord, your recurring rent expense will decrease.
Your recurring expenses will differ based on the type of business you operate. Examples of recurring expenses include regular utility bills, routine sales and marketing expenses, and depreciation costs.

For instance, if you run a tech company, your recurring expenses might include:

• Office rent or lease payments: Costs for renting or leasing office space.
• Salaries and benefits: Regular payroll expenses for employees, including benefits like health insurance and retirement contributions.
• Software subscriptions: Ongoing payments for software licenses and subscriptions, such as project management tools, collaboration platforms, and development environments.
• Cloud services: Monthly fees for cloud storage, computing power, and other cloud-based services.
• Utilities: Regular expenses for electricity, internet, and other utilities necessary for office operations.
• Insurance premiums: Costs for various types of business insurance, including liability, property, health, and cybersecurity insurance.
• Office supplies: Recurring costs for office supplies such as paper, pens, and other necessary items.
• Marketing expenses: Ongoing marketing costs, including digital advertising, social media campaigns, and content creation.
•  IT maintenance and support: Regular expenses for maintaining and supporting IT infrastructure, including hardware, software, and network systems.
• Professional services: Fees for ongoing professional services such as accounting, legal counsel, and consulting.

What are non-recurring expenses?

A non-recurring charge is a one-time or infrequent expense that a business incurs and does not anticipate paying again in the future.

Significant company changes such as mergers, acquisitions, workforce reductions, and major upgrades may involve numerous non-recurring expenses. These costs can affect net income but often represent investments that enhance the overall success of the business. Non-recurring expenses, on the other hand, encompass restructuring costs, expansion costs, losses due to natural disasters or other unforeseen events, and significant legal lawsuit expenses.

Non-recurring costs typically appear on financial statements as follows:

• Income statement: Listed as indirect costs.
• Balance sheet: Classified as short-term liabilities.
• Cash flow statement: Recorded under operating, investing, or financing activities.

Possible non-recurring charges for a tech company, for example, might include:

• Purchasing new hardware: Buying servers, computers, or other tech equipment.
• Office renovation: Remodeling or upgrading office space.
• One-time marketing campaigns: Launching a major advertising blitz for a new product release.
• Legal fees for mergers or acquisitions: Costs associated with acquiring another company or merging with one.
• Moving expenses: Costs incurred when relocating the office or setting up a new location.
• Patent applications: Fees for filing patents or other intellectual property protection.
• Major software development projects: Developing a new product or a significant update.
• Consulting fees: One-time fees for specialized consulting services.
• Workforce reduction costs: Severance packages and other costs associated with downsizing.
• Cybersecurity upgrades: Major upgrades to cybersecurity infrastructure following a breach.
• Research and development: Large, one-time R&D projects aimed at innovation.
• Launch events: Costs associated with organizing and hosting a product launch event.

The importance of differentiating between recurring and non-recurring expenses.

Understanding the distinction between recurring and non-recurring charges can enhance your budgeting process and prevent unexpected financial surprises.

Recurring expenses are predictable, which helps with forecasting your cash flow requirements over a specific period. By monitoring these regular expenses, you can ensure sufficient cash availability to cover ongoing bills and other consistent costs. Any remaining funds can then be allocated toward non-recurring expenses or other strategic investments.

How to track and manage recurring expenses.

Businesses typically record recurring expenses as expenditures at the accounts payable level and may also track them within their budgets. These expenses are generally considered indirect operating costs and are listed on the income statement following net revenue to determine total operating income. Depending on the company, recurring expenses might be grouped under SG&A (Selling, General & Administrative Expenses) or G&A (General & Administrative Expenses) for clarity, or listed as separate line items for increased transparency. They are also reflected as liabilities on the balance sheet and recorded under operating activities in the cash flow statement.

Challenges in tracking recurring expenses.

As the complexity and volume of recurring expenses increase, several challenges may arise:

• Shadow spend: When employees bypass corporate expense policies and charge subscriptions or recurring services to corporate cards, untracked recurring expenses can accumulate.
• Subscription creep and sprawl: Subscriptions may grow uncontrollably due to shadow spend or unclear policies, leading to higher monthly costs as employees add new or extra services.
• SaaS and IT services: With many companies transitioning to SaaS and subscription-based IT services, managing these recurring costs becomes crucial. A significant portion of IT expenses may shift to recurring charges, requiring careful oversight to prevent cost escalation.
• Duplicate or erroneous expenses: Duplicate or incorrect expenses and invoices can lead to higher recurring costs if not identified promptly. Regular audits are helpful, but implementing a system to detect errors in real time is more effective

Tracking and managing recurring costs.

To effectively manage recurring expenses, consider these strategies:

1. Regular audits or reviews: Periodically review bank accounts, corporate cards, and expense reports to identify new or changing recurring expenses. This helps in managing subscription creep and shadow spend, and provides opportunities to cancel or renegotiate contracts.

2. Analyze annual recurring costs: Track annual spending on recurring expenses like subscriptions to identify areas for consolidation, negotiate better terms with suppliers, and develop a more accurate budget for future expenses.
3. Consolidate or renegotiate expenses: Consolidate recurring expenses into a single contract or renegotiate existing agreements to secure lower rates. This can improve supplier management and enhance efficiency.
4. Clarify expense policies and control spending: Define clear policies for employee approvals on subscriptions and recurring services, and address consequences for policy violations. Consider expense automation solutions or payment cards to better manage employee spending.
5. Automate expense management: Implement expense and accounts payable (AP) automation tools to track and manage expenses in real time. These tools offer advanced analytics to monitor expenditure patterns, detect changes, and identify issues with vendors.
6. Utilize payment cards: AI-powered payment card platforms can provide greater real-time control over employee spending. Set spending limits, restrict cards to specific services, and receive alerts for unusual or unauthorized transactions.

Strategies for handling non-recurring expenses.

Effectively managing non-recurring expenses requires careful planning and strategic approaches. Here are some tips to help handle these occasional but significant costs:

Maintain an emergency fund.

Keeping an emergency fund helps cover unexpected non-recurring expenses. This fund should be separate from your regular operating budget and set aside specifically for unforeseen costs such as equipment repairs, sudden legal fees, or unexpected losses. An adequately funded emergency reserve helps ensure that your business can absorb these expenses without disrupting your financial stability.

Plan for large purchases.

When anticipating large, non-recurring purchases like new equipment, major renovations, or significant expansions, it’s important to plan ahead. Create a detailed budget and timeline for these expenditures, and incorporate them into your financial forecasts. By preparing in advance, you can allocate resources effectively, avoid cash flow problems, and take advantage of any potential discounts or financing options.

Use sinking funds.

A sinking fund is a savings account dedicated to accumulating funds for future non-recurring expenses. Regularly contribute a set amount to this fund, based on your expected needs for large purchases or significant costs. When the time comes to make the expenditure, you can draw from this fund rather than scrambling to cover the costs from your operating budget.

Adjust your budget temporarily.

When a non-recurring expense arises, consider adjusting your budget temporarily to accommodate it. This might involve reallocating funds from less critical areas or postponing planned expenditures. Temporary budget adjustments help manage the immediate impact of the expense while ensuring that your overall financial strategy remains on track.

Common mistakes to avoid in expense management.

Effective expense management is crucial for maintaining a healthy financial status, yet businesses often encounter common pitfalls. Here are some typical mistakes to avoid when handling both recurring and non-recurring expenses, along with tips to prevent them:

Neglecting to track expenses regularly.

Mistake: Failing to regularly track and review expenses can lead to overspending, missed payments, or unnoticed financial discrepancies.
Tip: Implement a consistent process for monitoring and recording expenses. Utilize expense management tools to automate tracking and ensure timely updates. Schedule regular reviews of your financial statements to catch any anomalies or irregularities early.

Overlooking small recurring costs.

Mistake: Small recurring expenses, such as subscriptions or minor service fees, can add up over time and significantly impact your budget if not managed properly.

Tip: Regularly audit all recurring expenses, even those that seem minor. Automation is key to ensuring that expenses are still necessary and cost-effective.

Failing to plan for non-recurring expenses.

Mistake: Not preparing for non-recurring expenses can result in sudden cash flow issues or unanticipated financial strain.

Tip: Anticipate and plan for potential large expenses by setting aside funds in an emergency fund or sinking fund. Include these costs in your financial forecasts and budget for them well in advance to avoid financial surprises.

Ignoring changes in expense patterns.

Mistake: Not adjusting your budget or expense tracking to reflect changes in expense patterns, such as new contracts or increased costs, can lead to inaccurate financial planning.

Tip: Stay updated on any changes to recurring and non-recurring expenses. Adjust your budget and forecasts accordingly to reflect these changes and ensure that your financial plans remain accurate and relevant.

Inadequate expense policy management.

Mistake: Having a vague or poorly communicated expense policy can lead to inconsistent expense reporting and potential misuse of funds.

Tip: Develop and enforce a clear expense policy that outlines approval processes, spending limits, and reimbursement procedures. Ensure that all employees are aware of and understand the policy to maintain consistency and control.

Not utilizing expense management tools.

Mistake: Relying on manual processes for expense tracking can be inefficient and prone to errors.

Tip: Invest in expense management software that automates tracking, reporting, and analysis. These tools can provide real-time insights, reduce errors, and streamline the management of both recurring and non-recurring expenses.

Overlooking cost-benefit analysis.

Mistake: Not performing a cost-benefit analysis for major expenditures can result in overspending on initiatives that do not offer adequate returns.

Tip: Conduct a thorough cost-benefit analysis before committing to significant expenses or investments. Evaluate the potential returns and benefits against the costs to ensure that expenditures align with your business objectives and provide value.

How automation helps control recurring expenses.

Automating expense management and using payment card platforms offer comprehensive control over recurring costs, providing a cost-effective solution for small and medium-sized businesses aiming to minimize expenses. Here’s how automation can benefit your business:

Centralized management of recurring costs:

Automation centralizes expense tracking and management, improving efficiency and oversight. Many platforms feature dashboards that offer real-time reporting and analytics to visualize expense data clearly.

Real-time tracking and control:
Automated solutions enhance visibility and control over your expenses. With real-time tracking and reporting, these systems offer insights into spending activity. Payment card platforms further this control by allowing you to set restrictions on card usage, ensuring employees only make approved purchases.

Detection and analysis of recurring expenses:

Automation platforms can automatically identify and categorize recurring expenses, providing detailed analysis of subscriptions, suppliers, and payment frequencies.

Management of complex expenses:

Advanced automation platforms, often powered by machine learning, handle complex recurring expenses such as:

• Monthly variable costs (e.g., utility bills).
• Expenses split among multiple suppliers (e.g., rent across different landlords).
• Depreciation on assets.
• Regular fixed increments.
• Expenses subject to varying tax rates.

Scalable and flexible solutions:
Scalable platforms adapt to your company’s growth, consolidating recurring expense management into a single system. This eliminates the need for separate processes across different locations and departments.

Integration with ERP, payroll, and accounting systems:
Integrating automation platforms with your existing business systems enhances visibility into financial data and provides better control over recurring expenses across your organization.

Mastering expense management for financial stability.

Key takeaways for effective expense management.

1. Differentiate between expense types:

You want to understand the types of expenses to help with your forecasting and budgeting. Recurring expenses, such as monthly utilities and salaries, are predictable and can be budgeted for with regular tracking. Non-recurring expenses, like major equipment purchases or renovation costs, require careful planning and budgeting.

2. Implement best practices:

To manage recurring expenses efficiently, consider maintaining an emergency fund, planning for large purchases, using sinking funds, and temporarily adjusting your budget as needed. This will help you stay financially prepared and avoid disruptions.

3. Avoid common mistakes:

Avoid pitfalls such as neglecting regular expense tracking, overlooking small recurring costs, failing to plan for non-recurring expenses, and not utilizing expense management tools. Addressing these issues can prevent overspending and improve financial stability.

4. Automate your expenses:

Expense management automation and payment card platforms centralize and streamline expense tracking. Automation is rapidly replacing inefficient manual processes for capturing expense data, handling payments, and accounting entries. They offer real-time control, detect recurring expenses, manage complex costs, and integrate with other business systems, enhancing overall efficiency and financial oversight.

Airbase is an excellent tool for handling the workflows associated with and tracking all of your non-payroll spend. Our platform provides real-time monitoring of your spending, helping to prevent overspending and manage both recurring and one-time costs. You can oversee, manage, and control all your expenses from a single platform. Contact us for more.