What are discretionary expenses? Definition and examples

You know that not all expenses are created equal in your business. Some are essential, and some you could live without. Examples of discretionary expenses include travel expenses and software subscriptions.

But, however essential they may be, all expenses need to be tracked and managed, and discretionary costs are no different.

In this article, we define what are discretionary expenses for business and how they fit into your budget. We compare discretionary versus non-discretionary expenses. And we explain how to better manage your discretionary costs.

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. However, marketing expenses help boost revenue and are still important in helping your business thrive.

Discretionary expenses vs. essential expenses

One way to think about discretionary versus essential costs is to think about what you have control over. For example, the bank controls how much interest you pay on a loan. However, you can decide how much to budget for research and development. In this case, bank interest is essential, while research and development is discretionary.

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 its survival. Without retail space, it 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 some categories can overlap.

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.

Discretionary spending examples

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 deeper into these types of discretionary expenses to understand why they qualify:

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 examples of discretionary spending within marketing:

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

Investments

Making the right investments can yield immense profits for a successful business. For example, 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. You can boost your productivity by investing in tools that help with things like:

• Accounting automation
• Invoicing
• Spend management
• Project management

SaaS subscriptions are discretionary. While some tools might seem indispensable, you can still opt for cheaper plans or alternatives, thus reducing your expenditure.

Employee perks & entertainment

Perks are essential to fostering a good quality of life amongst your staff and, by extension, attracting top talent to your company. However, you control how much 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 and entertainment 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 cover accommodation costs but not food expenses. Some large companies might offer generous T&E expense allowances, but these same policies might not suit small businesses. This is why travel expenses are also included under discretionary spending.

Office improvements

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

Now, companies offer different kinds of perks, like:

• Equipment allowances
• Home office upgrade stipends
• Upskilling opportunitie

‍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.

Budgeting for discretionary expenses in your business

Now that you’ve seen some discretionary expenses examples, the next question is likely: How do you budget for these costs? The good news is that these are within your control, so you can easily forecast them if you make a deliberate plan.

Here are things to consider when budgeting for discretionary expenses:

• Track your spending: Always keep a close eye on what you’ve spent in the past so you can use that information to plan for the future
• Set limits: Remember that discretionary spending is within your control, so communicate to your team how much you’re willing to spend on business travel, for example
• Prioritize the most important expenses: Budget for the expenses that are going to positively impact your business the most, and deprioritize or set lower limits on the others that may be more ancillary
• Plan for big expenses: If you know you need to make a large purchase because you have a big conference coming up or you need to renovate your office, plan for that expense and work around it in your budget
• Avoid impulse purchases: The big shiny thing in front of you at this moment may seem necessary, but when you budget, you really have to ask yourself: Will this expense help your bottom line, or is it more of an impulse buy?
• Review, analyze, and adjust: Like with any budget, you have to constantly review and make sure it fits your needs, and fitting your discretionary expenses in requires the same level of reflection and iteration

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 that doesn’t offer sufficient ROI is a common mistake. This happens due to a lack of recurring expense tracking and feedback. Take the time to record and track all your expenses. Categorize every spending decision's business impact, 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 managing your budget, consider 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, it can also serve as a basic guide for business spending planning.

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.

‍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. A cash margin of safety or reserve helps you scale your cost-cutting efforts gradually, analyze your discretionary expense trends, and create ideal spending levels without disrupting current workflows.

5. Set up an expense review process

Take the time each quarter to review your current discretionary spending with your finance team and stakeholders. ‍A 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 to define an expense policy. In doing so, you can automate expense approval and free your employees' time for value-added tasks like analyzing expense trends.

A good expense policy defines spending limits by department or 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.

Ramp software can automate discretionary expense management

Discretionary expenses can quickly become out of control if you don’t track your spending. With Ramp's corporate cards and automated expense management software, monitoring and streamlining 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. Here’s how:

• Digitized expense policies: Ramp helps you digitize your expense policy, giving your employees full visibility into approved expenses. Create rule-based expense workflows and 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.
• Virtual cards: 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, resulting in greater ROI. Forecast your operating budget or drill deeper into your monthly business expenses to reveal potential efficiency gains. ‍

See why Ramp customers save an average of 5% annually with our interactive demo.