Sales, General, and Administrative Expense cost management is crucial during a crisis to minimize costs and keep the firm afloat. The more these expenses are, the more money the business must bring in to break even. But to keep these costs under control, management must always pay close attention to discretionary costs. The term doesn’t ring a bell? Don’t worry! In this article, we’ll go over what discretionary costs are and how to get them under control as soon as possible.
What is a discretionary expense?
A discretionary expense is one that a company or family can live without if necessary. Nonessential spending is commonly used to define discretionary expenses. This indicates that a company or household can continue to operate even if all discretionary consumer spending ceases.
What is the difference between discretionary and non-discretionary expenses
To be clear, discretionary spending is a choice. There would be no legal consequences if you did not pay a specific cost in any given month. If you don’t publish fliers or update your website, your business may suffer, but it will still exist.
Rent, salaries, and certain insurances, on the other hand, are necessary. You have a legal obligation to pay these on a monthly basis. And if you don’t, there’s a good risk you’ll face legal repercussions, fines, or even be forced to close your doors.
Why do discretionary and non-discretionary expenses matter
Examining your discretionary spending is critical because knowing where your money goes gives a roadmap to achieving your financial objectives. They’re also the easiest to save money on if your financial circumstances change or you want to spend more elsewhere. Consider how important your discretionary costs are to you and whether they add value to your life as you make a list. Although you may discover some unnecessary expenses and consider removing them, the purpose of identifying and prioritizing your discretionary purchases isn’t always to reduce your “fun” spending. Rather, it’s to ensure that you’re focusing on the things that are most essential to you.
These could include deferring a costly marketing event, reducing freelancer and outsourced agency work, and deferring the large workplace blowout party until next month.
However, in order to perform all of this, you must have a real-time perspective of discretionary expenditure. And for most businesses, this is a huge challenge. Discretionary spending is more difficult to control than essential spending since it changes frequently.
Another advantage of budgeting is that it helps you to plan ahead for discretionary costs later in the year.
Examples of discretionary expenses
• Business Travel
• Team perks
• Office Improvement
However, just because these costs CAN be reduced does not indicate they are unneeded in the first place. Many, if not all, can be decreased only in the near term, not in the long run. You could definitely get by for a month without promoting or offering any employee training. Maintaining existence without them, on the other hand, can destroy a firm just as effectively as excessive spending. Consider it similar to coffee. You can certainly stop buying coffee for your office and no one will die as a result. At first, yes. Then your under-caffeinated staff may accidentally kill each other, and the business as a whole.
It’s a delicate balancing act to determine how much you can and should limit your discretionary spending. Discretionary spending, on the other hand, fluctuates a lot more than essential spending. The cost of your entire pay is pretty predictable; but, marketing campaigns and travel expenses are far more erratic. All of this makes managing discretionary spending even more difficult.
Manage your discretionary and non-discretionary expenses
So where do you begin in what might appear to be a labyrinth of spend management?
First and foremost, find a straightforward and effective spend management system that tracks all expenses. With Expensya, spending options that are flexible (virtual payment cards for online purchases, invoice processing tools, and more), payment records stay available so you may double-check each payment if necessary and keep track of who approved which spending by using approval tracking software. Find out more about our solution here.
But most importantly, these costs must be taken seriously. Keep a tight check on what’s being spent and why, and make sure the company’s finances are respected.