What is Discretionary Spending and How to Manage it

Within a company, not all types of spend are equal. You may have come across the term “discretionary spending,” but not necessarily know exactly what that means — or what kind of expenditure it refers to. If that’s the case, don’t worry — this article is here to help.

Below, we’ll analyze the differences between essential and discretionary spending, look at the types of costs that fall under the discretionary label, explain why these differences can sometimes be more nuanced than you might think, and take a dive into how best to manage your discretionary spend.

But, first things first. Let’s start with a clear definition of discretionary spend.

What is Discretionary Spend?

At the highest level, the differentiator between discretionary expenses and essential expenses is whether the expense is a “nice to have” or a “must have.” 

An everyday discretionary spending definition might be the difference between buying the fully kitted out Tesla of your dreams and buying groceries or paying your electricity bill. The first of these, while undoubtedly nice, is not an essential item. The second, since humans require food and heat to live, most certainly is. You might want the first, but you have to have the second.

Businesses have discretionary and essential expenses as well. A TV advertising campaign during a high profile show could be a great way of bringing in new users to your business, but chances are that it’s not an expense that’s considered absolutely essential for your business to continue. On the other hand, a physical brick-and-mortar store must pay rent for the premises that it operates from, just as it must pay the salaries of the staff employed by the company or certain types of business insurance.

Discretionary expenses are paid for using discretionary income — referring to whatever money is left once essential costs are covered. In good times, there is likely to be more discretionary budget available, while these costs may be curtailed during challenging periods since they can be most easily cut. 

These expenses are typically linked with improving the reputation of a company with its employees and customers alike: whether that’s investing in perks to attract employees or spreading awareness among customers.

Discretionary Spending Does NOT Mean Non-Essential

You might take issue with the idea that certain parts of a business are considered “nice to haves” and not essential. For example, a fancy ad talking up your latest product could be read as a vanity play on your part. But you also do have to find some way of getting word out about your business in order for it to grow. In other words, marketing might technically be discretionary (your business can get through the next week without it), but it is necessary to spend money on if you want your business to thrive in the future.

This kind of nuance has to be considered when it comes to discretionary spending. In many cases, you can argue that certain costs are essential to grow a business and therefore aren’t totally discretionary. Advertising and marketing is one. So too could be spending money on a nice office, since that may be needed to attract talent to your business from a hiring perspective. But these are not fixed costs the way that payroll or taxes are. They are also not essential in the purest sense of the term since, while they can help your business grow, they are likely not essential in the strictest sense of the term.

One of the hallmarks of discretionary spend is also that it is highly flexible. Although areas like marketing are key for growing businesses, you can behave in an agile manner and vary your spend by adopting different strategies or operating approaches on a frequent basis. That could mean that, while you will likely have to pay to advertise your product, this doesn’t have to be done every single month (or, in some other cases, potentially longer), thereby making them fit the discretionary label. In other words, these are costs that can be reduced in the short term, even if they may be essential in the long term. You can cut back on staff training events for a month or so if the going gets tough. But doing so indefinitely would be a bad idea.

Discretionary Spending Examples

The list of discretionary expenses for a company is long. This list is by no means exhaustive. However, it gives a sense of some of the behaviors a business might engage in that are considered non-essential (in the purest sense) and, most importantly, can vary at any given time. Examples include:

• Marketing campaigns and advertising: Covering both on- and offline advertising and marketing to spread the word about your company.
• Attending or hosting events: Anything from hosting your own special live events or sponsoring trade events to attending and exhibiting at existing ones.
• Bringing on freelance staff: Alongside your full time, salaried employees, you may also bring on board agency and freelance staff to support your efforts across multiple roles.
• Public relations: Like marketing campaigns and advertising, PR is crucial for promoting the work you’re doing as a company, whether that’s getting you quoted or profiled in the media or distributing your press releases to the right people.
• Mergers and acquisitions: Potentially pricey mergers and acquisitions can help you acquire other businesses or assets that fit alongside your own core business. M&A can frequently be a way to gain complementary tools or services so that you do not have to pay to develop them yourselves.
• Buying back stock/Other stock-related areas: Stock options are a part of every business. If you’re a startup, distributing shares of the company can help you get the best talent and investors. If you’re a large publicly traded company, areas like stock buybacks may be a good use of excess cash.
• Research and development (R&D): Research and development is all about spending money today that will, hopefully, bear fruit tomorrow — or, at least, several months or years from now.
• Subscriptions: Whether it’s communication tools like Slack, mailing tools like MailChimp, business suites like Office 365, there are multiple recurring costs in the forms of SaaS tools that can help grow the business.
• Travel costs: Sending employees around the world — even around the country — costs money. 
• Employee perks: From entertainment to food and drink, discretionary expenses will be used to cover those extra “perks” that make your business stand out from the pack.  

Again, you can argue that some of these are more essential than others, but they are nonetheless discretionary expenses that you can dial up and down accordingly. They may also not be fixed in terms of what they go toward each month. Even if the marketing team spends roughly the same money each month, they could vary this between a big online advertising push one month and, the next, shooting a commercial for airing on TV. 

How to Manage Discretionary Spend

The first key to managing any kind of spend – discretionary or otherwise – is to track it. Tracking discretionary spend is not necessarily more challenging than tracking essential expenses, but it requires more active engagement since discretionary spend is more likely to fluctuate month-on-month. Organizations must make sure that they are tracking spend that falls into this category to avoid waste, and to be aware of where expenses can potentially be reduced if needed. By its nature, discretionary spend can be changed more quickly (the difference between, for example, spending less ad money on Facebook one month versus having to look for an entirely new, cheaper office to pay rent on) than essential costs.

One of the best ways to track discretionary spend is with a spend management system. This should offer features like easy uploading of receipts, spend approval tracking (to see who approved each expense), payment logs, and flexible budget tools. For example, Mesh offers tools that let finance managers control and view every transaction, across all departments. This includes setting expense limits, looking to see exactly how every company credit or debit card is being used, and setting up real-time alerts so you’re always in control and on budget. It can also give you actionable data for optimizing spend – from coming up with cheaper alternatives to creating accurate forecasts.

It’s the best way to manage discretionary spend. That’s especially true for tax reasons, since discretionary expenses like travel and other expense categories may be deductible come tax time.

Don’t Let Discretionary Spend Get Out of Control

We’ve covered the definition of discretionary spending, given some examples of it in action, and discussed some of the nuances in this area. But, alongside the definition of discretionary spending, one of the most crucial aspects of this topic is to best understand how to manage discretionary spending.

Operational costs such as salaries are fixed. Although you can vary them, they are broadly predictable and will work in the same way most months – likely even down to the day that the money leaves your account. Once implemented, these costs virtually take care of themselves. 

But discretionary spending is on a more “ad hoc” basis. This requires investment in a centralized spend management system that can ensure that you keep on top of this important area of spend to avoid waste and keep finances looking good. Let this kind of discretionary spending get out of control, and it can be virtually impossible to manage. Get it right, however, and you’ll be able to continue growing your business in a smart, flexible way quarter on quarter, and year on year.

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