Discretionary Spending

When discussing discretionary spending it may be a little more complicated that it first appears. In the posting Analyzing Expenses we discussed three categories of expenses – fixed expenses, variable expenses, and semi-variable expenses. This posting involves semi-variable expenses, but with a bit of a nuanced approach.

Semi-Variable Expenses

Previously we used the definition of a semi-variable expense as one that has a component that is fixed and a component that is variable, and gave as an example a retailer that rents space in a mall and pays rent that has a fixed monthly amount and an amount that is a percentage of sales. That is the common definition in accounting terms, but is it sufficient. In other words, what is really driving the variable part of the expense?

Just How Variable is This Semi-Variable Component?

In the example above it is clear that the driver of the variable portion of the semi-variable expense is the store’s sales. But what if there is something else to look at; something that may appear fixed but is actually variable. We identified the impact of the variable component, but what about the fixed component? Could that in fact be variable as well when viewed as having an element of discretionary spending?

Discretionary Spending Defined

For discussion purposes we will define discretionary spending as that which we can do without if necessary. So, look again at the example above. What could impact the “fixed” component of the rent; location within the mall, the actual mall where the store is, when the rent was negotiated, etc.? For example, as desirable as it may seem, perhaps that central location in the mall does not provide enough revenue to justify a higher fixed rate than a different location. When the lease was negotiated was the vacancy rate of the mall considered? Does the store absolutely need to be in this mall or could it be in a surrounding strip mall? All of these are things which impact the supposedly fixed aspect of the semi-variable expense, thus meaning there is a discretionary component.

Some Clearer Examples

Let imagine you are opening a new office and need to furnish it. What do you do? Do you run down to the nearest office furniture store and buy new desks, file cabinets, and chairs? That is what a lot of people do. But, do you really need a new desk, chair or filing cabinet? Probably not! So, if a used desk can be bought for $100 that would have cost $800 for an equivalent new model, then there is discretionary spending of $700. See the posting Think Used for more on the advantages of buying used items.

What about your company? Do you take into consideration options for business expenses to minimize them, thus reserving that discretionary portion for your bottom line? It’s not just buying used furniture and equipment where you can eliminate discretionary spending. Many expenses (office supplies, phone expenses, cleaning services, etc.) have a discretionary component. All you need to do is be willing to take the time to carefully study your expenses and consider alternatives. This does not mean you need to forgo quality in order to do this.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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