Business expenses are something every company needs to keep a close eye on. After all, if your outgoings exceed your revenue regularly, then it’s a clear sign that you’re not performing well. It’s down to your CFO—and your accounting team—to monitor any expenditure and to reduce those figures where they can.
One area that can fluctuate a lot is discretionary expenses. These can vary according to your business type and your modus operandi.
What are discretionary expenses, and how do they differ from fixed expenses? And how can you keep some control over your discretionary expenses so they don’t overly damage your balance sheet?
What Are Discretionary Expenses?
Unless you work on the accounting side of a business, your eyes may light up at the mention of discretionary expenses. If the idea of lobster and a bottle of 2017 Jones Family Cabernet Napa springs to mind, it’s time to rethink what you envisage. One simple way to think of discretionary expenses is that they are non-necessary expenses when it comes to running a business.
Once your organization has paid all its essential costs, any expenses left can be labelled as ‘discretionary.’ If you have to make an off-cycle payment to any of your staff, then that is a fixed payment. If you have to cover the costs of some of your staff attending an industry conference, then that would be a discretionary expense.
Most businesses will look at their budget for the year ahead and once essential (and expected) costs are covered, they will have a discretionary funding budget that pays close attention to how much can be spent. They will also look at the year-end accounts to see what the actual costs have been.
Discretionary vs Non-Discretionary Expenses
Discretionary expenses are variable and may vary in level over the financial year. Fixed expenses (non-discretionary expenses) are your essential costs that keep the business running on a day-to-day basis. For example, any payments for your location (such as rent or mortgage) are both fixed and essential. Another fixed expense would be your payroll.
Both of these examples may be subject to change (rent increases or salary raises), but you would know that well in advance and can plan for it. Similarly, utility bills may vary over the year, but you have some idea of the ballpark figure for each utility based on historical data and current market rates.
One difference to note is that it is almost impossible to eliminate fixed expenses, though some, such as electricity, may be reduced through energy-saving measures. With discretionary expenses, you can look at reducing or eliminating some of them, especially if you are operating on a restrictive budget.
Examples Of Discretionary Expenses
Discretionary expenses can go way beyond the fantasy of lobster and fine wine. Knowing where your discretionary expenses may occur can help you better monitor and control them.
1. Marketing
You may think of marketing as an essential cost, but it’s not; it’s discretionary. Your business would still run without it, though, of course, you might not be attracting many new customers.
The thing to think about with marketing is ROI (return on investment). If a particular type of marketing is not producing a healthy ROI (or a negative one), you may decide to forego it.
Another thing to consider is that marketing costs can vary (greatly) over the year. You may have high expenditures in certain months or for a new product launch. If you do feel that your marketing costs could be reined in, look at each marketing project and calculate the ROI from those expenses, and see if you can reduce or even eliminate any.
2. Subscriptions
Again, you might see some of your SaaS subscriptions as essential to the effective running of your business. However, if you audit your subscriptions, you may find that some are less necessary than others and that add-ons to some have increased the costs. If you are looking to reduce costs, look at what each one brings to the table.
For example, if you have a CRM (customer relationship management) solution, it most likely helps your staff (and your customers), so it would probably be kept. And if you have staff working a remote or hybrid model, a communication app is going to help teams stay in touch and collaborate.
Look at all your subscriptions, gauge their effectiveness and usefulness, and check for unnecessary (or non-essential) add-ons.
3. Entertainment
Lobster and wine? Hopefully not. But there will be times when entertaining clients or your own staff will appear on the balance sheet. You may have a client in town who could place a substantial order with you. Or you may have a team who worked hard on launching a small business virtual phone system, and you want to treat them with a weekend away.
Nobody is saying you should eliminate all entertainment; it can be something that makes a difference to a potential deal or to staff morale. However, it is something you should monitor closely and control well. Place limits on entertainment expenditure so it doesn’t damage your profit at the end of the year.
4. Travel Expenses
How often do your executives or other staff travel each year? More importantly, how much of that travel is absolutely necessary, and how much could be classified as junkets? If you send a team to a trade show, then new business could result from that. You could see that as being more important than flying the breadth of the country for a business meeting that could be held by video call.
You also need to consider the ancillary expenses for any travel. These can include accommodation, food, drink, and so on. As with entertainment, break travel expenses into what may be necessary (the trade show) and what can be eliminated using an alternative.
5. Gifts And Perks
Gifts and perks are other discretionary expenses you should tread carefully with, especially if you’re a smaller business. You can include any freebies given out as part of a loyalty program though these do help with customer retention rates and brand advocacy.
What you might want to look at are internal gifts and perks. While these may help improve employee morale and boost employee retention rates, they can be a major expense. Look at how much you spend in this area and if you can reduce any of them. Focus on a positive company culture and career development to keep employees happy.
How To Manage Your Discretionary Expenses
So, you can see that discretionary expenses cover a wide range of possible expenditures. Some of those expenses may seem more essential than others, but you still need to find a way to manage them effectively.
1. Have Clear Expense Policies
Having clear policies and guidelines on discretionary expenses can help prevent individuals and departments from overspending. You can set limits on how much can be spent and introduce an approval system for expenditures over a certain level. Your policy can also determine what these expenses can be used for and what is not allowed.
Depending on the size of your business, you may want to consider utilizing expense management software or an accounting automation software to monitor spending.
2. Audit Your Spending
Something else you should do is audit your current discretionary spending. It can also help if you look at the previous year’s spending to identify if there have been any significant changes. Once you have listed all such expenditures, you can then more closely examine each item on the list and prioritize the expenses in order of how important each is to your business.
Remember to look at what each expense brings to your business and, in the case of things like marketing, what your ROI is on each expense.
3. Set Up Budgets for Discretionary Expenses
In conjunction with your expense policy, you may want to set budgets for each team/department. These should consider previous spending levels and the importance of each expense. Different departments will have dramatically different needs. For example, your marketing department will have higher discretionary expenses than your manufacturing department, so you need to take those differences into account.
In addition to any expense management software (or instead of), you can appoint someone to take responsibility for each of those budgets while still requiring approval from the C-suite for any spend over a certain amount.
How Fyle Helps You Manage Discretionary Expenses
Automate Expense Approvals
One-click approvals (view, edit, approve, or return) anywhere, anytime! Fyle automates any workflow–sequential, parallel, or project-based, you name it, Fyle can take care of it.
Approvers across teams, entities, or subsidiaries? Fyle centralizes it all to help you simply expense management in seconds.
Real-Time Expense Analytics
Fyle centralizes all your company’s expenses in a single dashboard, enabling you to easily identify discretionary expenses in real-time. Accountants can easily drill down by category, vendor, project, employee, or department empowering them to identify potential risks, inefficiencies, and overspending.
