Heard the term "discretionary spending," but not quite sure what kinds of expenses it applies to? No problem.
This article goes into more detail than is probably necessary to make sure that you never have this issue again.
We're going to look at the key differences between discretionary and essential expenses, list a whole range of different discretionary costs, and talk about why managing these costs is both more important and more difficult than it ought to be.
But first, we'd better start with a clear definition.
What is discretionary spending?
Discretionary spending applies to costs and expenses that are non-essential.
A lot of these costs don’t feel “non-essential” (excuse the double negative). We’ll look at some examples shortly, and many of these will feel completely necessary.
But this distinction should be looked at literally. For example, even though most companies know they need to advertise, whether or not they end up paying for advertising is at the discretion of the Chief Marketing Officer or CEO. It may be practically vital if you want your brand to be discovered and to compete in your market, but it’s not strictly speaking essential.
Discretionary spending vs essential expenses
So to be clear, discretionary expenses are optional. In any given month you could not pay a certain cost and there wouldn’t be any legal ramifications. It might be bad for business if you don’t print flyers or update your website, but the business will continue.
On the other hand, costs like rent, salaries, and certain insurances are essential. You are legally obliged to pay these each month. And if you don’t, there’s a very real chance that you’ll be hit with court cases, fines, or have to shut down altogether.
Examples of essential expenses
We’re about to look at a detailed list of discretionary expenses. But first it might help to see some costs that are not optional.
- Employee salaries
- Debts repayments (including loans and mortgages)
- Utility bills (including Internet costs)
- Inventory (especially for retail and other businesses that sell physical goods)
- Software that directly powers your business
- Necessary hardware (for instance, point-of-sale machines for stores)
The difference here is pretty clear. You can’t choose not to have these things this month. Without them, your business can’t run.
So what do discretionary costs look like, by contrast?
Discretionary spending examples
There’s no better way to really spell out what’s considered a discretionary expense than with a nice long list. We’ll try to be as comprehensive as possible, but of course there will be some costs missing.
Once again, the most important thing to remember is that discretionary doesn’t mean that every business owner considers these optional. In fact, many of these costs really do need to be paid if you want to have any kind of long-term success.
But since the amounts can fluctuate hugely from month to month, and because you can choose not to invest in these areas for months or even years at a time, they’re definitely discretionary.
Marketing is a classic example of something that is discretionary but not optional. You simply don’t stand a chance of succeeding without some sort of marketing strategy and a little money to back it up.
But what makes most marketing a classic discretionary expense is just how variable it can be. You can choose to attack entirely new strategies from quarter to quarter. You’re not locked into one way of operating, and you can change tactics tomorrow if you like.
Discretionary marketing costs include:
- Advertising (online and more traditional)
- Events (attending or exhibiting at trade shows, and hosting your own)
- Video production
- Agencies and freelancers
- Public relations (including press release distribution)
- External design costs
- Collateral (business cards, posters, and flyers)
That's just a quick list. So how can you know which marketing strategies to devote resources to? According to Tim Brown of Hook Agency, the key is to look at your current clients:
"Start with the things that have paid your company back significantly in the past by looking at where your current best customers come from. Then double down on the approaches that work. If you’re somewhat new to marketing, look at competitors – but mostly look where the attention of ideal customers is. Find the events, websites, and social sites where they spend their time – and push your efforts into that first."
If your business finds itself in a particularly strong position, it might be time to make a few investments. These are quite clearly not essential expenses - most companies never have these kinds of opportunities.
Potential discretionary investments include:
- Mergers and acquisitions
- Real estate
- Research and development
In some cases, investments are made to propel growth. You purchase other companies in order to acquire their business model and increase your own offerings.
Many businesses also make investments just like you would in your normal life. They use spare company cash to collect stocks and hopefully make gains in the long term.
Others put their money into R&D in the hopes of encouraging innovation in their industry. This could mean funding external startups, non-profit work, or creating research teams in-house to tackle particular issues.
Some subscriptions will be essential - web hosting for your online store or the back-end software your product runs on.
But lots of company subscriptions are discretionary. These might include:
- Communication tools (like Slack for internal communication, or Mailchimp for external)
- Efficiency and planning tools (like Trello, Notion, or Asana)
- Sales and marketing CRMs
- Business suites (Microsoft Office, Adobe Creative Suite, and more)
- Add-ons to your website or digital product (Intercom is a good example)
Some of these definitely don’t feel optional. Sales and marketing CRMs are so commonplace now that you’d think it’s impossible to live without them.
But you could build them yourself, and to some extent sales and marketing themselves are discretionary. So despite feeling like you wouldn’t want to go without HubSpot, Salesforce, and the like, they’re not absolute essentials in most cases.
More and more businesses consider travel to be a necessary ingredient for growth. And while this might often be true, travel still falls firmly into the discretionary category.
Many of the common reasons why business teams would travel include:
- Client meetings
- Trade shows and conferences
- Pitch events (especially for startups)
- Board meetings (if the board convenes elsewhere)
- Cold calling
- Visiting warehouses, production spaces, and other offices
None of these has to happen for the business to survive. But businesses need to keep a close eye on travel spending as it can easily get out of hand.
Good corporate travel management is essential to a well-run business, even if travel itself isn’t an essential expense.
For many business leaders, these are the quintessential discretionary costs. Being able to offer your team coffee, parties, and excursions is a nice luxury.
Typical team perks include:
- Food and drink (free breakfast is becoming a staple)
- Team off-sites and events
- Exercise classes and gym memberships
- Company cars and paid transport
And just like some of the other expenses we’ve looked at, these might not feel “discretionary” at all. In order to attract and retain the best talent, many workplaces offer generous conditions to staff.
This is becoming increasingly important. According to some commentators, “the search for better workplace benefits is among the three top reasons why younger employees change jobs.”
So while these costs definitely don’t fall under the “essentials,” they’re a core part of workplace culture for many companies.
Hand-in-hand with team perks is the need to offer a comfortable work environment. Modern offices can include everything from cosy couches and painted slogans to darkened nap rooms.
Being able to spruce up the office is almost the definition of “discretionary.” If the company can squirrel away a few extra dollars, you’re able to make the upgrades you desire. But that’s only if you can keep some cash aside.
These sorts of office costs might include:
- Painting (including company logos and motivational messages)
- Posters and other printed material
- Office plants (and the costs that come with maintaining these)
- New furniture
- Kitchen equipment (coffee machines, a fancy fridge, or a better dishwasher)
- Upgraded office chairs
- Specialty lighting
There is so much more that we could add to this list, but you get the gist.
Now that we’ve gone over all these different kinds of discretionary spending, we still have a key question to answer.
Why does discretionary spend matter?
The main reason that business leaders care about all of this is that, when it’s time to balance the budget, cost-cutting usually has to come from discretionary funds. By definition, you can’t cut essential costs without really shaking things up.
By contrast, if you need to save $30,000 this month to keep your balance sheet even. There may be a handful of discretionary areas to do this.
These could include postponing an expense marketing event you had planned, cutting back on freelancers and outsourced agency work, or saving the big office blowout party for next month.
But in order to be able to do all of this, you must have a clear view of discretionary spending in real time. And this is an enormous challenge for most businesses.
Because it fluctuates, discretionary spending is actually much harder to manage than essential spending.
Most CEOs might have the big picture of where their teams’ money goes. You give $50,000 per month to marketing, $25,000 to sales, $5,000 for office food and Friday drinks, and so on. Team leaders are able to spend this money the way they see fit - it’s discretionary, after all.
But when it’s time to make changes - even to increase team budgets - you can’t be sure which of this money has been used for what. Which makes it hard to cut the ineffective schemes, and also difficult to double down on the good.
How to manage discretionary spending
Because discretionary costs are different from quarter to quarter, it’s vital to have a clear system to manage them. When you’re just starting out, every payment runs through the founder or CEO, and they more or less know where the money is going.
But as you grow and scale, this is no longer workable.
The most important thing to think about is how people make discretionary payments:
Your strategic spend - salaries, raw materials, and other fixed costs - are predictable. They’re made on the same day each month, to the same people, in the same way. Once they’re set up, they pretty much run themselves.
Discretionary spend is far more ad hoc. Even if your teams spend the same overall amount each month, they likely do this in different ways.
One month you marketing team hires a digital agency to build a micro-site. This takes up most of the budget, paid by invoice in three installments.
The next month they promote this micro-site with social media and search ads. This is paid by credit card at the end of the month.
The third month they attend a conference in another city. Much of the budget is used for flights, accommodation, and meals. Some of these are paid by credit card, and for others they rely on expense reports (filed when they return).
This third month presents a mix of discretionary spending and expenses (per the graphic above). And this multitude of payment methods is what makes spending a drag to manage.
For this reason, you need to find a smart, centralized spend management system to manage all spending - but especially discretionary.
Must-haves for your spend management system
In order to track spending properly, your system needs to give you:
- Flexible ways to spend (virtual cards for online, physical cards, invoice processing tools, and more)
- Variable limits and budgets because each team should have its own set amount
- Approval tracking so that you always know who approved each expense
- Payment logs so that you can check every individual payment - just in case
- Easy receipt upload because there’s nothing worse than fumbling through a box full of receipts
We’ve already written a comprehensive guide to spend management. It’s well worth your time.
For now, just know that discretionary spending won’t manage itself. And no matter how diligent (and even frugal) you are, it’s only going to grow and become harder to control.
The big takeaways
Aside from our big lists of costs, here are the main things you need to remember:
- “Discretionary” doesn’t always mean “optional” to everyone. Some expenses still feel completely necessary, even if they’re not “essential.”
- Discretionary expenses include a wide range of payments across all of your business teams.
- Because costs are so varied, it’s hard to manage them all (especially for your finance teams)
Most importantly, you need to take these expenses seriously. Keep a close eye on what's spent, and why, and ensure that company finances are respected as they should be.