A Guide to Discretionary Expenses

There are so many different expenses involved in running a business that it can be hard to keep track of them all. Just when you think you know where all your money is going, you miss something and end up over budget. It’s frustrating, and it poses a risk to your business's long-term financial health. So, what do you do next?

To get your budget on track, it's important to figure out what you’re regularly spending money on. When it comes time to trim the excess, discretionary expenses are usually where you'll start.

Learn more about these expenses and how to manage them to stay on budget.

What Are Discretionary Expenses?

Some expenses are necessary to keep your business running. These are called non discretionary or fixed expenses. Rent or mortgage payments, utility bills, employee compensation, and taxes are all common examples of non discretionary expenses.

Discretionary expenses are all the other costs you incur beyond the essentials. If you don’t strictly need the spending to keep your business operations afloat, it’s a discretionary expense.

You typically pay for discretionary items out of your discretionary funding—the money you have left over after paying your essential expenses.

How They Differ from Fixed Expenses

Discretionary costs generally vary from month to month or quarter to quarter. They are variable expenses, not fixed expenses. That means they're usually easier to adjust or eliminate if you need to save money.

Mandatory spending examples, such as rent and insurance premiums, are much less flexible. It’s difficult to quickly reduce fixed business expenses or entitlement spending, since they often involve contracts and long-term commitments. However, they are much easier to plan and budget for, because they'll typically be the same every time you're billed.

Examples of Discretionary Expenses

What qualifies as a discretionary expenditure will vary between industries and businesses. Cloud storage, for instance, might be an essential expense for a software company and a discretionary expense for a retail store.

Still, some types of discretionary expenses are common across the board.

Entertainment and Leisure

Almost all costs related to entertainment and leisure are discretionary expenses.

For example, treating your team to a day at the ballgame to raise morale would be a discretionary entertainment expense.

Other entertainment and leisure discretionary spending may include:

• Running an annual company retreat
• Conducting games and competitions
• Putting on holiday parties or events

These expenses benefit your business, but they’re not absolutely essential.

Non-Essential Shopping

Any non-essential shopping you do for your business also qualifies as unnecessary expenses.

For instance, if you purchase new furniture and wall art for the office, that should come out of your discretionary account. Your business would still function without these items.

Dining Out and Travel

Many business owners consider traveling and dining out a key part of growing their companies. However, these expenses are not strictly necessary for business operations, so they’re discretionary.

These travel and food expenses are generally in the discretionary category:

• Visiting conferences and trade shows
• Going to client meetings at restaurants
• Attending pitch events
• Making sales trips
• Traveling to different business locations like other offices or warehouses

Companies with between 50 and 200 employees average over 20 business trips per year. With the right budgeting practices, you can stay on top of your dining and travel expenses without breaking the bank.

Marketing

As important as marketing is to a business's success, it’s still a discretionary expense. Your business operations would function without marketing spending, even if you’d struggle to attract new customers.

Marketing costs are also incredibly variable from month to month. One month, a company can spend tens of thousands of dollars on a major campaign and just a few thousand the next month on more modest promotions.

Some examples of discretionary marketing spending include:

• Traditional and digital advertising costs
• Payments to external designers and copywriters
• Costs to produce marketing materials like flyers and business cards
• Costs associated with exhibiting at trade shows or other events
• Payments to public relations firms or marketing agencies
• Expenses related to producing promotional content for your website or social media accounts

If your current marketing strategy isn’t producing the results you want, you have the option to scrap it entirely and try something different.

Subscriptions

Modern businesses often pay for a variety of company subscriptions, many of which are discretionary expenses. Any subscriptions that your business can function without are discretionary costs.

Some examples of these discretionary subscriptions include:

• Customer relationship management (CRM) software
• Project management tools like Asana and Notion
• Business suites like Google Workspace or Microsoft Office
• Communication tools like Slack

You probably don’t want to run your business without your company software subscriptions, but it is usually possible. That’s what makes them discretionary expenses for most companies.

The Importance of Managing Them Effectively

Understanding discretionary vs non discretionary expenses is about more than just categorizing your costs. You need to know exactly where your business funds are going to make the most of your budget.

Impact on Budgeting

When you’re budgeting for your business, you should always start with your fixed, mandatory expenses. Since these expenses are the same from month to month, it’s easier to plan for them and set aside funds to fulfill these financial obligations.

Once you know how much you have to spend on non discretionary expenses, you’ll see how much money you have left over for your discretionary budget. Any money you don’t spend on absolute essentials is available for marketing, travel, office improvements, and other discretionary purchases.

Look to your discretionary budget if your business encounters any cash flow or budgetary problems and start cutting costs in this category to save money. Reducing your spending on essential expenses instead is tricky and would require more significant adjustments in your business.

Say, for example, you’re over budget by $10,000 this month. Examine your discretionary spending to find areas to cut back or eliminate costs.

Maybe you’re planning a company retreat that you can pare down or postpone. Perhaps you can delay or cut back on a big new marketing campaign you’re launching. Whatever the case may be, you should find places to save money within your discretionary spending.

Role in Financial Planning and Savings

Establishing an emergency fund is a great step toward making your business recession-proof.

The money you have left over after paying all your essential and discretionary expenses each month can go toward your savings. However, if you don’t have a handle on your discretionary spending, you’ll have to dip into your savings every time you go over budget.

Regularly going over budget with your discretionary spending will disrupt your ability to save and plan for the future. The better you can estimate how much you’ll spend on discretionary expenses, the more reliable your financial planning will be.

Strategies for Controlling Discretionary Spending

Some people view discretionary accounts as free money to put toward anything related to the business. A wise business leader knows that's not the case.

When you manage your discretionary spending properly, you know exactly how much you can invest in different categories like marketing and other areas to further your business. You need to set clear goals and be deliberate with your spending in this category. That way, you'll be in control of your funds and be able to take advantage of any valuable opportunities that arise.

Try these tips for managing your discretionary expenses.

Set Spending Limits

Non-essential spending is a huge category that contains many different types of expenses. Go beyond a broad discretionary budget and set more specific spending limits on different expense categories within discretionary spending.

Start by determining the different types of discretionary expenses your business spends money on. List all the categories and the amount you’re currently spending on each per month. Good old fashioned spreadsheets can be useful here, but it's okay to estimate these figures if necessary.

Next, set spending limits on each category and make sure your total is less than or equal to your overall discretionary spending budget. If you want to set up or increase savings, keep your spending limits lower than the budget.

Keep in mind that some discretionary expenses have higher returns on investment (ROI) than others. Consider setting higher spending limits on categories that offer better ROI. Marketing, for example, is discretionary, but offers better ROI than redecorating the office.

Use Budgeting Tools and Apps

You need to know where your discretionary funds are going to effectively manage your spending. If you’re not sure what you're spending your discretionary funds on, read through your recent credit card and bank statements.

Start with a clear view of your discretionary spending. Then, consider using budgeting tools and apps to stay on top of that spending.

Financial software and apps will help you track where your money’s going in real time. You’ll never have to wonder if your cash balance is large enough to pay for the newest discretionary expense you want.

Gain insights into changes in your discretionary spending over time and track trends. Monitoring your spending with budgeting tools will improve your forecasting and help you find areas to cut costs.

Prioritize Spending Based on Goals and Values

Instead of making your discretionary spending decisions in the moment, set spending guidelines ahead of time. These guidelines should come from your business goals and the things you value most in your company.

For example, if team spirit and unity are very important to your business, prioritize perks for your employees in your discretionary budget. If your goal is to bring in a certain number of new clients, prioritize travel to attend trade shows and client meetings instead.

Your discretionary spending budget must align with your plan for the company and the things that are most important to you. That way, you're making the most of every dollar you spend, while setting up your business for future success.

Begin Your Expense Management Today

Every business has discretionary expenses. The key to protecting your business's financial health is to allocate money to the right discretionary costs and cut the rest.

Marketing, subscriptions, travel, and entertainment costs are all generally considered discretionary expenses. Examine your current spending and set discretionary spending limits based on the goals and values most important to your business.

Rely on budget and financial management tools to help with this process.These tools give you real-time insights into where you’re spending money and how much is left in your budget.

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