How to budget for fixed and variable expenses
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If your business is growing, you know all about the paperwork that comes with expense reconciliation. The more clients, contractors, and employees you take on, the more receipts and invoices you have to manage. If you have multiple people swiping business credit cards or proposing new investments, it can turn into an accounting nightmare quickly.
That's why many businesses are now transitioning from paper or spreadsheet expense reconciliation to expense management software. Some big problems are solved when you take this area of your business digital, including:
- Human error is minimized, if not eliminated.
- You and your employees spend less time balancing the books.
- You may not need to hire an accounting team due to the simplicity and accuracy of modern software.
Before you can start managing your expenses, tracking your cash, and preparing for audits or tax time, you need a basic understanding of fixed vs. variable expenses.
In this article, we'll explain fixed and variable expenses and how to budget for each in your expense management system.
What is a fixed expense?
Fixed expenses are costs that remain consistent in amount and frequency, making them predictable over a given period. You can count on these expenses to hit the bank at routine intervals and know how much they'll cost.
You may increase or decrease the amount of your budget dedicated to these expenses at times, but the amount then remains stable for a period. You always know a fixed expense is coming every week, month, or other interval.
It's easier to manage and track fixed expenses because they're never a surprise. Rates may increase occasionally, and you may switch to a different vendor or provider, but you can predict a fixed expense far easier than a variable expense.
Examples of fixed expenses
Some common fixed expenses include:
- Lease or mortgage payments
- Insurance premiums
- Loan repayments
- Subscriptions and membership dues
While some may include utility bills as an example of a fixed expense, they're not always easy to predict. We'll talk about some expenses that could fit into either the variable or fixed categories in just a moment.
What is a variable expense?
Variable expenses are costs that fluctuate over time or that arrive with less predictability. You may know that these expenses are coming but never really know how much you'll pay or when the invoice may be due.
When expense reconciliation gets tedious, it's often due to variable expenses. Think of them as the more chaotic elements of budgeting. Making sure that these costs are properly tracked and don't get out of control will require far more effort if you're still handling expense reconciliation on paper or with manual spreadsheets.
Examples of variable expenses
Some common variable expenses include:
- Raw materials
- Production or office supplies
- Payroll and commissions
- Packaging and shipping costs
- Credit card payments
- Entertainment, fuel, and grocery bills
- Fleet management
- Advertising expenses
What costs are both fixed and variable?
When discussing fixed vs. variable expenses, you'll run into some costs that aren't easily categorized.
Real estate is a great example. Fixed expenses, like mortgage payments and property taxes, remain constant regardless of your property's occupancy. On the other hand, variable expenses, like utility bills and maintenance costs, fluctuate based on activity or occupancy, making them less predictable.
Contractor or vendor payments are another example that could fit into either category. Depending on the contract, you could pay a consultant or contractor a fixed amount at routine intervals or varying amounts whenever an invoice arrives. Vendor management is another topic that can get quite complex, but the right software can help you out there as well.
Your business is unique
You'll have a unique list of variable expenses and fixed expenses that reflect industry standards and how you do business. You may find a way to make your advertising expenses more predictable while the cost of raw materials continues to fluctuate every month.
What's important is that you always have control over your budget. You want to protect your profits while seeing them grow with time. If your current expense reconciliation system is too complicated or allows variable expenses to get out of control, it's time to consider a new approach to accounting.
How to budget for fixed and variable expenses
Budgeting fixed expenses is rather straightforward. The process can vary, but it comes down to a few basic steps:
- List all expenses that are predictable in amount and frequency.
- Make sure you have the money in the bank to cover these expenses when due. That may require you to negotiate due dates if cash flow is limited at certain times of the month or year.
- If your budget is stretched or your working capital is running low, eliminate any unnecessary fixed expenses at least for a short period. You may also negotiate to lower some of these expenses. For example, you negotiate to have the annual fee dropped from your business credit card or to have the interest rate reduced.
You may start to feel a headache coming on when it's time to budget for variable expenses. There are a variety of approaches that you can use, but the following steps are common:
- List all variable expenses. You may not know exactly how much you'll pay for these costs each month or year, but you do know that you'll have to pay for them at some point.
- Collect data and look at trends over time. This is where using expense management software is extremely beneficial. You can look back at expense records for insights that help you predict future expenses. For instance, you may see that for the past five years, you've spent more on advertising in the last quarter of the year and the least in the second quarter.
- Set budgeting limitations for each variable expense. There are many ways to do this. Using insight from past expense records, you can determine what percentage of your budget is allocated to each cost. You can also set maximum spending limits for each cost to keep expenses under control.
- Review all variable expenses on a routine basis. Look at the data to see where you're spending most of your money and make sure it's worth the investment. Make changes as necessary to maximize your budget and see those profits grow.
Expense reconciliation is easier with Ramp
Ramp's expense management software is powered by AI. You no longer need a member of your team to track all expenses and send endless requests for receipts, invoices, and expense explanations. Your team is connected by software and the computer does the work for you. As money is spent, team members simply send snapshots of receipts for instant categorization, tracking, and budgeting. They can use Ramp's mobile app or text messaging.
Have you ever spent hours or even days trying to figure out why the numbers aren't matching up, only to discover that a duplicate receipt or missing invoice was to blame? Ramp saves you that time by detecting duplicate receipts and other common human accounting errors.
You can even improve oversight and accountability by allowing Ramp to replace your spreadsheet or those massive cabinets hoarding paper trails. Set restrictions and limitations on each business card to make sure employees are aware of acceptable charges and spending limits. Document all expense approvals so you know who authorized each dollar spent. You'll even have the ability to lock employee cards if needed, and so much more.
AI-powered software makes it easier than ever to highlight wasteful spending and keep track of variable and fixed expenses. Try Ramp to make expense reconciliation simple for your business.