Two critical activities for any business are monitoring and controlling expenditures. Some costs are straightforward to identify and plan for, like employee salaries, utilities, and rent. These are considered fixed or mandatory expenses.
But what about the expenses that aren’t absolutely necessary, but still feel important? These are called discretionary expenses. Understanding how to manage them can make a huge difference to your company’s success.
While not essential for day-to-day operations, these expenses often support company culture, employee engagement, and business growth. However, when left unchecked, discretionary spending can strain budgets, disrupt cash flow, and silently erode profitability.
Many businesses find it difficult to track these costs, distinguish between “nice to have” and “strategically necessary,” and detect waste before it affects the bottom line.
This guide explains what counts as a discretionary expense, shares strategies to manage and control these costs, and highlights common pitfalls organizations face along the way.
Key Takeaways (KTAs)
- Discretionary expenses are non-essential costs that a business chooses to take on to make their business run better in some way.
- Common examples of discretionary expenses include marketing and advertising, employee perks and benefits, business travel and entertainment, software subscriptions or purchases, and office upgrades and renovations.
- An easy way to distinguish between discretionary expenses and mandatory expenses is to ask yourself, “Can the business continue to operate successfully without spending money on these things?”
- Best practices for controlling discretionary expenses include setting spending limits, requiring pre-approval for big purchases, and regularly reviewing spending patterns to find ways to save.
What Are Discretionary Expenses?
Discretionary expenses are costs that are non-essential and can be adjusted or eliminated from a budget without impacting a business’s core operations.
The best way to understand discretionary expenses is to think of them as flexible spending. These are costs that a business can decide to approve or decline based on its current needs and priorities.
Unlike fixed expenses, which the business needs to operate, discretionary expenses aren’t absolutely necessary. They might be things like boosting company culture, enhancing the employee experience, making fleet upgrades, or purchasing branded uniforms.
Because these expenses aren’t as necessary as things like rent or utilities, the business can choose whether to spend the money or not.
For example, a company might choose to pay for a team-building event. This event isn’t essential for the business to create its products or services, but it could help employees work together better.
Or, a company might choose to subscribe to a business magazine. It isn’t required for the business to function, but it could give employees useful information and ideas.
Other common examples include business travel beyond essential trips, office decor or furniture upgrades, marketing and advertising campaigns, non-critical software, employee recognition awards or gifts, and branded merchandise and swag.
The key to understanding discretionary expenses is to realize that they are much easier to cut or adjust than fixed or mandatory expenses. If a business needs to save money, it wouldn’t stop paying rent or payroll (essential expenses), but it might cancel team events or magazine subscriptions (discretionary expenses).
What Are Discretionary Funds?
While discretionary expenses sometimes come up out of nowhere, most of the time you can budget for them. When you budget specifically for non-essential business expenses, that money becomes discretionary funds.
These funds are managed separately from core operational, or fixed, expense budgets. This separation allows you to approve flexible spending within set limits.
However, the flexible nature of discretionary finds does require diligent tracking to prevent waste or misalignment with business goals. Here are some strategies to make that possible.
Strategies And Best Practices To Control Discretionary Spending
Establish Spending Limits
Set a clear budget for discretionary spending for each department, project, or employee. This helps everyone know what they can and can’t spend and prevents overspending before it happens.
Link Discretionary Spending So Specific Business Objectives
Before approving a discretionary expense, consider whether or not the purchase helps the business achieve a specific goal. For example, will a new software subscription help the team be more productive? If the answer isn’t clear, the expense might not be worth it.
Monitor Real-Time Transactions To Flag Unusual Activity
Track spending as it happens. Monitoring activity in real time allows you to quickly spot any unusual or wasteful spending and correct it to prevent budget overruns.
Require Pre-Approval For Higher-Value Discretionary Purchases
Set a specific dollar amount above which a manager or other higher-up needs to approve purchases. This extra step ensures that careful consideration is given to bigger expenses and that they are truly necessary.
Review Spending Regularly To Identify Savings Opportunities And ROI
Every month or so, review your discretionary spending with three questions in mind: 1) Where is money being spent? 2) Are there any opportunities to save money? 3) Is a purchase still providing a good return on investment (ROI).
How Coast Helps Control Discretionary Spend
Want a simpler, more effective way to manage your discretionary expenses? Try Coast’s full suite of spending and monitoring controls.
Card controls: Set rules on how, when, and where a card can be used or create specific rules for different teams, roles, or types of expenses. For example, customize a specific card so that it has a daily spending limit or only works at a certain store, or give your marketing team more leeway in their discretionary expenses than the IT team.
Card controls like these prevent wasteful perks and unauthorized spending.
Receipt capture: Employees can capture receipts directly through their phones. The electronic receipts are then automatically matched to the right transactions. You can even set automated reminders to eliminate the need to chase down receipts.
This eliminates lost receipts that distort discretionary reporting.
Accurate job costing: With Coast, you can prompt employees to assign purchases to specific jobs at the point of sale, providing clear, accurate visibility into all spending whether it’s mandatory or discretionary.
Job costing accuracy ensures discretionary spend is separated from project-critical expenses.
Budget alerts and approval flows: Before any money is spent, managers can get an alert. They can then approve or decline the purchase right away, which prevents surprise expenses and stops overspending before it hits the books.
Real-time visibility: Coast’s online platform gives your business a clear, real-time view of all discretionary expenses. This makes it easier to see where money is going and to make smarter decisions for the business.
For more on how Coast can help you manage your money better, visit CoastPay.com.
Frequently Asked Questions [FAQs]
Can a discretionary expense become essential?
Yes, a discretionary expense can become essential when it becomes necessary for the continued successful operation of the business.
For example, an owner may subscribe to a project management software and roll it out to one or two employees to see how it works. It starts out as a discretionary expense because, at this point, it’s “non-essential” to the continued successful operation of the business.
But, if the owner continues to distribute the software until the entire company is using it every day to organize its work, it may very quickly become a core part of operations and no longer be a discretionary expense.
How much budget should my business allocate to discretionary expenses?
A lot of variables go into figuring out how much budget to allocate to discretionary expenses, so there’s no one-size-fits-all answer. The right amount for your business will depend on things like industry, operation size, and financial goals (just to name a few).
So, a startup might have a very small discretionary budget as it works to get things up and running, while a large, established company might have a much bigger discretionary budget because the mandatory expenses are already taken care of.
The key is to start with a budget that feels right for your operation, review it regularly to make sure it’s working, and make changes if it’s not.
Are discretionary expenses tax-deductible?
Some discretionary expenses can be tax-deductible, as long as they are considered “ordinary and necessary” business expenses. This means they must be common and helpful for the business.
If you’re concerned about whether or not a discretionary expense is tax-deductible, don’t hesitate to talk to an accountant or tax professional.
What’s the difference between discretionary expenses and fixed expenses?
The main difference between discretionary and fixed expenses is that the latter are costs that don’t change based on how much the business produces.
Prime examples of fixed expenses are rent and insurance because they don’t change if you make one widget or 1 million widgets.
Another difference between the two is that fixed expenses are almost always essential to the successful continued operation of the business, while discretionary expenses are not required for the business to operate.
A third difference is the level of control and flexibility a business has over the two types of expenses. Fixed expenses have to be paid for the business to keep its doors open, so there’s little to no flexibility in spending.
There’s much more flexibility with discretionary expenses because the business can approve or deny the spending without affecting operations.
