What is a Discretionary Expense?
A discretionary expense is a cost that a business or household can get by without, if necessary. These expenses are often defined as things that are "wants" rather than "needs." For example, a business may allow employees to charge certain meal and entertainment costs to the company. This is done in order to promote goodwill with employees, rather than to ensure the firm's survival.
- A discretionary expense is a cost that is not essential for the operation of a home or a business.
- In a corporate environment, discretionary expenses are usually costs linked with improving a company’s standing with its customers and employees.
- Tracking discretionary expenses enables businesses and households to identify where they can save money in times of financial difficulties.
- Discretionary expenses vary, depending on the business or person.
Understanding Discretionary Expenses
When times are hard and short-term cash flow issues emerge, managers of companies will first look to weed out any costs deemed unnecessary. Discretionary expenses, the costs associated with business activities that are not directly tied to operational procedures, will be first to go as stopping them is unlikely to impact the company’s ability to function and produce goods.
In a corporate environment, discretionary expenses are usually costs linked with promoting or boosting a company’s standing with its customers and employees. Buying the raw materials used to produce goods will likely be considered essential. Spending less on employee training programs perhaps less so.
Everyday people also encounter moments when it is necessary to consider which of their expenses they can live without. A sensible person who runs into financial difficulties is more likely to prioritize paying utility bills over financing a vacation.
Businesses and individuals pay for discretionary expenses with discretionary income: the amount of money left over after paying for taxes and necessities.
Essential Expenses vs. Discretionary Expenses
Households incur two types of expenses. Certain expenses they must either pay by law (such as taxes and health insurance) or pay to keep the household running (such as rent, food, and transportation costs). These expenses are essential expenses, as the income earner does not have the option of not paying them in any given month without incurring consequences.
Other expenses, such as vacation costs and luxury items, are not necessary to maintain a household and, thus, are classified as discretionary expenses. In other words, the income earner can pay for these goods or services at his own discretion.
Advantages of Discretionary Expenses
In tough economic times, it may be necessary for households and businesses to cut expenditures in response to decreases in income. Thus, it is often desirable to track discretionary expenses separately from essential expenses so that it is easy to see where and to what degree expenses can be reduced.
One helpful budgeting tactic is to rank discretionary expenses in order of importance from the least to most important. Therefore, if a job loss or income reduction forces household budget cuts, household members can easily identify the first discretionary expense to place on the chopping block.
The concept of what is discretionary is subjective and may differ considerably among individuals and businesses.
For example, if needs must, a stable, well-established company could probably get away with slashing its advertising budget for a while. In contrast, a new company facing hardship would probably look to make cut backs elsewhere, mindful that boosting exposure and getting its name out there is imperative to keeping it afloat.