Financial management is all about understanding the past and analyzing it to plan for the future. The finance department is responsible for keeping track of all funds coming in and out of the business to uncover trends that can be used to improve operations and ultimately increase revenue.
But what about large, unexpected costs that sometimes can’t be planned for and don’t accurately reflect the business’s ongoing expenses? Including these costs in financial statements would be misleading, but they can’t simply be ignored. That’s where one-time costs come in.
One-time costs are designed to let finance departments track these costs without derailing financial statements or projections. These costs can be a very helpful tool for financial planners if they understand them and use them appropriately.
What are one-time costs?
One-time costs are charges on a company's earnings that won’t come back around like service subscriptions or contract renewals. A one-time charge can be a cash charge, such as severance pay or a capital expense (capex). Or, it can be a non-cash charge such as the depreciation of assets. Note that finance departments also track one-time revenues, for example, reselling a piece of equipment that is no longer needed.
One-time costs can sometimes arise from unexpected blows to the business, such as natural disasters or a robbery. For example, consider a retail store that is hit by a hurricane that destroys one of its locations. Losses due to temporary shutdown, debris removal, and repair costs would all be considered one-time costs. It wouldn’t make sense for the business to include these losses in its financial statements at the end of the year or factor it into financial projections for the year ahead because it was a random act of nature and unlikely to happen again.
Why are one-time costs significant?
One-time costs can be difficult from a financial management standpoint. They are generally excluded from financial statements because they are an outlier. However, they still need to be tracked because they do impact the bottom line. For this reason, they are often excluded from financial statements or labeled as extraordinary items to avoid skewing results and financial projections.
When investors evaluate a business, they are trying to analyze its profit potential. They wouldn’t want one-time expenses, like repaving the parking lot, included in the financial statement because that would make the business appear less profitable than it is.
Some businesses use one-time costs irresponsibly to improve the appearance of their financial situation. Writing off recurring expenses as a one-time expense pushes some of the numbers under the rug, thereby keeping them out of public view. This is obviously a dangerous, unethical practice, and businesses do not want to deal with the blowback.
Some businesses even restructure charges to boost their future earnings and profits. Firms reduce future depreciation and so enhance earnings by taking substantial restructuring charges. When profitability is measured in terms of return, this is amplified because substantial restructuring charges diminish the book value of capital and equity.
Due to a few dishonest bad apples, analysts and investors may view one-time costs with skepticism. These costs should be used as a tool for the business and investors to better analyze its finances, not fudge numbers. For this reason, companies must be transparent about one-time costs and include a line item on the financial statement so investors do an honest evaluation.
Managing one-time costs
Managing and accurately recording one-time costs requires a finance department to maintain close ties to everything happening in the business. This prevents inaccurately categorizing a one-time expense as a recurring expense or vice versa. This is important because, as discussed above, inaccuracies can skew data and even mislead potential investors.
With the help of a data platform like Causal, businesses can plug into databases around the business to centralize expenses. This increased visibility helps identify actual one-time expenses and expense trends from every corner of the company.
If a company knows an event that will have multiple one-time costs associated with it is coming up, it may pay off to train employees on reporting associated expenses. For example, if marketing submits a receipt for a new sign, the finance team may not immediately assume that it’s related to the new location opening. By creating a process and ensuring all employees understand why it’s important, you can prevent items from slipping through the cracks.
Often, one-time costs are not predictable. However, if a company knows that a major rebrand or investment is coming up, they may build that into the budget in advance. Just because an expense only occurs once doesn’t mean the business can’t plan for it to prevent debt or major disruptions.
Staying on top one-time costs
Creating a separate line-item for one-time costs is helpful for investors trying to accurately evaluate the earning potential of a business because it wouldn’t make sense to subtract a one-time expense from revenue. Financial advisors can make sure that one-offs won’t derail the budget or mar the balance sheets by properly handling one-time expenses.
Tracking and accurately reporting one-time costs is one of the most critical roles a finance team has. Managing these costs requires close communication with all department leaders to ensure no costs are inaccurately categorized. Overall, one-time costs are an important tool for ensuring that financial statements and future projections can be accurate without overlooking other expenses.