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Discretionary spending can be a crucial yet misunderstood aspect of business budgeting. Some expenses may be necessary to running an organization. Other expenses — while still important — may not be essential to keeping your business operating. These are your discretionary expenses.
Tracking discretionary spending could help you streamline your budget and potentially optimize cash flow. However, it may be challenging to distinguish discretionary spending from non-discretionary spending and to potentially help control these costs.
Learn more about discretionary spending, how it may differ from non-discretionary spending, and how to help manage business costs to potentially improve financial decision-making.
What Is Discretionary Spending?
Discretionary spending refers to expenses that are not essential to maintaining basic business operations. Discretionary expenses are:
- Adjustable: They may be increased or decreased to meet essential business needs.
- Strategic: They may be tied to long-term goals, such as improving employee engagement or customer retention.
- Variable: They may be seasonal or variable in cost, as opposed to recurring monthly or quarterly on a fixed basis.
What Is the Difference Between Discretionary and Non-Discretionary Spending?
The difference between discretionary and non-discretionary expenses lies in whether they are essential to business operations.
Discretionary spending may be optional — including “nice to have” expenses that you might incur after essential expenses are paid for.
Discretionary expenses may be flexible, variable, and tied to long-term goals or innovation strategies instead of immediate business needs.
Non-discretionary spending may includes expenses that are necessary to running a business. Common examples may include office rent and employee payroll. Failing to pay non-discretionary expenses may also result in consequences such as fines and business disruptions.
Consider a clothing retailer with a brick-and-mortar shop. For this business, non-discretionary expenses might include utility bills and insurance payments for the store. Meanwhile, discretionary spending examples might include social media marketing campaigns and complimentary snacks and drinks for employees in the break room.
Examples of Business Discretionary Spending
Discretionary spending examples by category may include:
- Marketing and advertising: Ad placements, social media campaigns, influencer partnerships, sponsored content
- Employee engagement: Team-building events, holiday parties, office perks
- Professional development: Industry conferences, certifications, networking events, training programs
- Software subscriptions: Marketing or sales automation platforms, premium or enterprise tiers, add-on features
- Workspace upgrades: New office furniture, hardware updates, decor
Discretionary spending categories may also vary from business to business. For example, an office space might be a discretionary expense for a business that operates remotely. However, it might be a non-discretionary expense for a business that relies on in-person sales, collaborations, or meetings.
Potential Challenges With Discretionary Spending
Managing discretionary expenses may prove challenging for some companies, such as growing businesses that are innovating and investing in new strategies.
Consider potential obstacles, such as:
- Categorizing expenses: It may not always be clear which expenses are necessary for running a startup or new business and which are considered optional or flexible.
- Tracking costs: It may be difficult to have full visibility of expenses for an entire organization or to establish clear expense policies, especially across departments, locations, and teams.
- Limiting spending: It might be difficult to discern which discretionary expenses to cut, especially if they are helping to potentially drive revenue or measurable results for the business.
Benefits of Tracking Discretionary Spending
Controlling and tracking discretionary spending may lead to positive outcomes for a company's financial health and long-term growth.
Managing these expenses might help organizations:
- Optimize budgets: Consider allocating resources more efficiently, covering necessary expenses before investing in optional or flexible initiatives.
- Improve financial decision-making: Consider tracking which expenses deliver measurable returns and which don't generate value, and adjust spending accordingly.
- Increase accountability: You might consider setting up regular expense reviews to help check that employee spending is aligned with business goals.
Take Charge of Your Discretionary Spending
Managing discretionary spending may be a key part of running a business. While these expenses may not be essential to maintaining operations, they might help meet important goals like improving brand reputation, increasing customer engagement, and boosting employee retention.
Tracking, organizing, and categorizing discretionary spending may help businesses make more data-backed budgeting decisions and maintain financial health.
Business Discretionary Spending FAQ
What is discretionary spending?
Discretionary spending refers to expenses that may not be essential to running everyday business operations. Discretionary expenses may be flexible, variable, and tied to long-term goals or innovation strategies instead of immediate business needs.
What’s the difference between discretionary expenses and non-discretionary expenses?
Discretionary expenses may be considered optional, and cutting discretionary spending may not have a significant impact on a business's core operations. Non-discretionary expenses, such as rent, utilities, and insurance payments, are often necessary to keep a business running.
What are examples of discretionary spending?
Some examples of discretionary spending include marketing and advertising campaigns, professional training courses, software subscriptions, charitable donations, and team-building events.
Why is tracking discretionary spending important?
Tracking discretionary spending is important because it may help companies better understand where their money is going, potentially optimize budgets by cutting back on certain expenses, and make more informed financial decisions for growing their business.
How might managing discretionary spending benefit a business?
Managing discretionary spending may help businesses improve cash flow and profits, mitigate financial risks, and decide how to invest in strategic initiatives for brand recognition, leadership development, and employee engagement.
Photo: Getty Images
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