Financial expenses (What are, Types and Importance)

The financial expenses are those that are produced by third party financing agents or by charging various services for certain corporate finance activities such as the production of this. Companies or people with businesses use this tool regularly to start up their commercial or productive activities.

The financial expenses are being resources or money from third parties, which has been provided to said person or company. In general, credits or money loans, whether directly from a bank, are financial expenses. The company or person commits with a certain amount of resources to finance their own financial activity.

Types of financial expenses

The commitments acquired by third parties to finance an activity are divided as follows:

  • Interest on loans of money, credits or financial debts: these loans with money are requested directly from financial institutions or banks. When a commitment is acquired, the company or the applicant will have to pay a monthly interest rate, depending on the amount granted. The credits are directly with the banks.
  • Commissions of the banks : this type is in the case of the use of the credit cards, where the company or the people spend the limit of their account to be able to finance operations. With all the operations provided by banks, companies or personal accounts have to pay a percentage or interest. In the case of bank transfers, they subtract a small percentage that goes directly to the bank, with loan cancellations, the company delivered the final amount in pure interest.
  • Activities with currencies of other countries : when companies make monetary changes, there will always be a negative margin, since the value of the currencies is not the same. Companies often resort to these changes to work with the currency that moves most in the market, and to be able to finance all production processes. There are companies that are dedicated solely to the currency market.
  • Insurance : insurance premiums for some risk in the field of finance count as a financial expense.
  • Update of provisions : are all those resources that are acquired and conserved, and are not available until paying the corresponding invoice.

Financial expenses for companies

When talking about deductible expenses are those that grant a benefit to the company or business, for example, the purchase of a series of electronic devices that enhance good management or a car that functions as a single means of transport for the company, in case If the owner of the company or business buys a car for personal use with money granted from a loan, this would not be a deductible expense.

Deductible expenses must be well documented, recorded and related to the productive life of the company.

Difference between financial expenses and simple expenses

These two are usually confused, but there is a big difference between them, this is:

  • When a part or a loan is paid, this does not become a financial expense, since only money that was borrowed is being paid, and this immediately ceases to be a debt to the company. The return of the money that was lent does not generate an expense for the company, it is considered a simple economic movement.
  • Interest resulting from bank loans or financial institutions if they are financial expenses. These are an amount of money that must be paid due to indebtedness with a third party. Why are they a financial expense? since you must pay for the money borrowed for the financing of the company or some particular process. borrowed money generates a fee, and this generates an interest that is part of the requested money. the interests collect a part of the resources. Interest is part of the deductible expenses.

Financial expenses in accounting

The financial expenses in the accounting book appear in the section or profit and loss account, these are divided into three groups, for debts with third parties, updating of provisions, debts with companies. The information in these accounts is that obtained during the entire accounting process of one year. Before recording the expenses in the corresponding accounts you must classify which are the financial expenses and those that are not, so that after the accounting process there is no confusion, and the accounts can square properly.

In the accounting field, financial expenses are of vital importance in the final income statement, since these are subtracted from the ordinary result of the company. Depending on the country, financial expenses may be deductible for both “companies” and companies, as they are part of the economic activity.

Importance of the order of financial expenses

Maintaining a good administration and control of the financial expenses can be beneficial for the company since it allows to optimize all the planning in the financial field and to know what are the pending interests, which turn out to be a commitment for the company. It allows to know what the limits of indebtedness are and to know the budget that the company has for the financing of business processes and activities.

It generates a savings mentality for companies, which is favorable for its budget, since it allows it to be kept intact for future activities or businesses. Currently there are several programs that facilitate the order of all financial expenses, helping to have a better job in the administrative area.