What are discretionary expenses? Definition and examples

Modern companies have many types of expenses—some essential and some not. In this article, we define discretionary expenses and compare them against non-discretionary expenses, to give you a better sense of how to manage them for your business.

What are discretionary expenses?

Discretionary expenses are non-essential costs for your business that you generally have control over. They are also known as discretionary costs, discretionary spending, non-essential spending, or non-essential expenses. However, just because an expense is non-essential doesn’t mean it’s unnecessary or unimportant.

For example, marketing expenses aren’t as essential to your business as operating expenses, like rent and utility payments. But marketing expenses help boost revenue and are still important to help your business to thrive.

Discretionary expenses vs. essential expenses

One way to think about discretionary vs. essential costs is to think about what you have control over. For example, you decide how much to budget for research and development. However, you don’t control the amount of bank interest you pay. In this case, research and development is discretionary, while bank interest is essential.

Some non-discretionary expenses at one company might be discretionary at another. Let’s consider two businesses: Company A, a supermarket, and Company B, a remote-first SaaS company.

Company A's rent payments are essential to their survival. Without retail space, Company A will struggle to sell groceries. However, rent payments are probably non-discretionary for Company B. Its teams work remotely, and the amount of money Company B devotes to office space is at its discretion.

The lesson here is to examine how critical an expense is to your company's short-term—and long-term—survival and classify it accordingly. Labels from other companies might not suit yours since the economics of every business are unique.

Fixed expenses vs. discretionary expenses

Fixed expenses refer to recurring costs that remain relatively consistent from period to period, while discretionary expenses are non-essential costs that businesses choose to incur. However, a business’s fixed expenses don’t always constitute essential spending, so there can be some overlap between the categories.

Examples of fixed expenses might include rent or mortgage payments, utilities, insurance premiums (like auto insurance), loan repayments, and subscriptions. However, subscriptions can also be considered a discretionary cost. While the subscription cost is consistent from month to month, it isn’t necessarily essential spending.

Examples of discretionary expenses

While every company's discretionary expenses are different, some expense categories tend to fall under the discretionary umbrella more often than not, like:

• Marketing
• Investments
• SaaS subscriptions
• Employee perks
• Travel expenses
• Office improvements

Let’s dig a little deeper into these examples to understand why they may count as discretionary spending.

Marketing

Marketing expenses are important for companies of all sizes. However, the amount of money you devote to marketing is at your discretion. You might decide to spend money on both paid ads and inbound marketing. Or, your strategies might change from one quarter to the next.

Here are some types of discretionary items within marketing:

• Advertising
• Content production
• Public relations
• Brand design
• Website design

Investments

A successful business can profit immensely by making the right investments. Your company might decide to buy a vendor that supplies essential raw materials to reduce procurement risk in your supply chain.

Like marketing, investments are important but discretionary. Here are some examples of other discretionary expenditures that fall under the investments umbrella:

• ‍Buyouts
• Mergers
• Real estate
• Research and development
• Intellectual property like patents

SaaS subscriptions

Every small business uses apps and tools to improve its workflows. Investing in accounting automation, invoicing, spend management, and productivity tools boost your efficiency. But what you spend on them is at your discretion.

‍Some tools might seem indispensable. However, you can still opt for cheaper plans or alternatives, thus reducing your expenditure. This is why SaaS subscriptions are discretionary.

Employee perks

Perks are essential to fostering a good quality of life amongst your staff and, by extension, to attracting top talent to your company. However, you control the amount of money you spend on these quality-of-life perks.

Here are some examples of employee perks:

• Transportation benefits
• Pantry and dining out
• On-site entertainment
• Gym memberships and fitness passes
• Parties
• Team-building exercises

As with SaaS subscriptions, many of these perks are necessary to retain top talent. However, you can control how much you spend on perks according to your priorities.

Travel expenses

Travel expenses may be a significant expense for your business, especially if you have a sales team. However, while travel expenses are important, you can regulate them with expense policies that define which items you’ll cover.

‍For example, you might choose to cover accommodation costs but not food expenses. Some companies, especially large ones, offer generous T&E expense allowances. These same policies might not suit small businesses, which is why travel expenses are discretionary.

Office improvements

Office improvements and other workplace enhancements have taken a backseat in today's remote-friendly climate. In the past, companies spent significant resources turning their offices into attractive workplaces.

These days, companies offer different kinds of perks such as equipment allowances, home office upgrade stipends, and upskilling opportunities.

‍While these costs are essential in attracting top talent, they’re not considered mandatory spending. You can moderate your spending based on the type of talent you wish to attract, making these expenses fully discretionary.

Why should you monitor discretionary spending?

Since discretionary spending is largely under your control, regular monitoring is important for your company’s financial health and successful expense management. In your analysis, you’ll likely find ways to reduce costs—not to mention boost net margins and cash flow.

‍Let’s say you want to boost net margins by 5% over the following year. You can reduce discretionary costs as part of your strategy to achieve that goal. Reducing your non-discretionary expenses (also called necessary expenses), like bank interest, credit card debt, or utility bill payments, is far more challenging.

Strategies for managing discretionary spending

Planning for discretionary expenses also involves using systems and strategies to manage your discretionary spending. If you fail to monitor and track your discretionary budget, your expenses might increase too quickly, leaving you with unsustainable margins and no emergency fund for your business.

Here are six strategies to prevent discretionary spending from getting out of control:

1. Measure expense ROI

Spending on expenses that don’t offer sufficient ROI is a common mistake. This happens due to a lack of recurring expense tracking and feedback. For example, you might purchase a SaaS tool to boost productivity, but your employees might not use it because they prefer another method.

The result is a wasted expense that compounds over time if you’re not receptive to employee feedback. Take the time to record and track all your expenses. Categorize the business impact every spending decision has, and you'll manage to measure ROI.

Remember that not all expenses offer a clear quantitative return. For instance, you might struggle to measure the impact of a new HR software subscription. However, this expense might be justifiable if it reduces employee onboarding time.

2. Categorize and track trends

Tracking trends in discretionary expenses is critical to squeezing the most out of your spending. Tracking trends in your expense reporting gives you the benefits like:

• Revealing your changing needs via your spending patterns
• Giving insights into efficiencies to see if you’re spending too much time on manual processes that an app or tool could automate
• Anticipating costs based on past spending throughout the fiscal year
• Exposing seasonal trends in your business

Breaking your spending into business-relevant categories helps you quickly isolate problem areas. You can dig deeper into specific processes and create greater efficiency. The result is optimized spending and a better understanding of your discretionary spending limits.

3. The 50-30-20 rule

If you’re having trouble getting started with or managing your budget, think about the 50-30-20 rule. This personal finance rule may not apply to every business, but it can at least be a place to begin as you consider your discretionary spending.

The 50-30-30 rule says that you should budget your spending based on this breakdown:

• 50% to needs
• 30% to wants
• 20% to savings

While this is generally recommended for individual budget planning, you can use it as a basic guide for planning for your business spending, too.

This means 50% of your income goes towards fixed expenses, 30% towards discretionary expenses, and 20% towards planning for the future.

4. Establish a cash margin of safety

In times of unexpected turbulence, you have to examine your discretionary spending and reduce expenses. Some companies reduce spending drastically, reducing employee morale and potentially damaging vendor relationships.

A cash margin of safety or reserve will help you scale your cost-cutting efforts gradually. You can spend more time analyzing your discretionary expense trends and create ideal spending levels without disrupting current workflows.

‍Most companies believe a six-month cash buffer works best. However, every business is different, so take the time to decide what works for you.

5. Set up an expense review process

Take the time each quarter to review your current discretionary spending with your finance team and stakeholders. For instance, if you discover that sales travel spending has increased dramatically, involve your head of sales to understand the issue.

‍A good review process helps you stay on top of your company's needs. You might discover that some expenses have become non-discretionary. For example, sales travel spending may have become essential because of changes in your product lines or client portfolio. Create review processes at logical business intervals and you'll elevate your financial performance.

6. Define and enforce expense policies

One of the best ways to control discretionary spending is by defining an expense policy. Some organizations struggle to enforce their expense policies due to disjointed or slow approval processes. These days, you can automate expense approval and free your employees' time for value-added tasks like analyzing your expense trends.

A good expense policy will define spending limits by department or by specific expense categories. These limits help you model worst-case expense scenarios and calculate margins. Make sure you involve department stakeholders before prescribing expense limits.

How Ramp helps you manage discretionary spending

Ramp's corporate cards and automated expense management software help you monitor discretionary spending and create a robust financial planning and analysis program. Here’s how:

Digitized expense policies

‍Forget manual expense approvals that waste time and confuse your employees. Ramp helps you digitize your expense policy, giving your employees full visibility into approved expenses. You can create rule-based expense workflows such as category- or team-based spending limits.

Ramp also helps you set up dynamic and conditional expense logic that adapts to your business's financial goals. Collect proof of purchase receipts, match them, and set approval thresholds to simplify expense management in minutes.

You can issue vendor-specific virtual cards and offer employees the ability to request exceptional expenses. Control card spend limits in real time so you’re always on top of your discretionary spending.

Analytics to track expense trends

Ramp centralizes all your company's spending in one place, helping you track discretionary expenses and receive up-to-the-minute insights. The platform's AI-powered engine highlights troublesome areas such as duplicate SaaS spending and unused partner rewards.

‍The result is greater ROI from your expenses. Ramp's powerful reporting platform helps you isolate spending based on every data point imaginable. Forecast your operating budget or drill deeper into your monthly business expenses to reveal potential efficiency gains.

‍Drill deeper into expense trends per department or category and analyze them in real time. You can also export data from Ramp to your favorite analytics tool to simplify your analysis workflows.

Discover savings

Ramp helps you save money in several ways. Our corporate cards offer an average savings of 5% on all spending with unlimited free employee cards. Plus, Ramp has no interest rate and no possibility of overspending.

‍Best of all, Ramp's deep database of SaaS expense data helps you benchmark your subscription pricing against your peers, helping you figure out if you’re paying too much for your software subscriptions.

‍Discretionary expenses can quickly become out of control if you’re not able to track your spending. With Ramp, monitoring your discretionary budget is simple. No matter what market conditions look like, you’ll stay on top of your spending, helping your business save money.