Definition: Discretionary expenses are costs associated with business activities that are not directly tied to operational procedures, and therefore can be reduced or removed without halting the business in the short run. In other words, these are non-essential or unnecessary costs that the business does not need in order to operate.
What Does Discretionary Expenses Mean?
What is the definition of discretionary expenses? The cost of those activities, if stopped, the business could continue running and producing in the short-run without disruption. While all parts of a business are important in some way, managers must sometimes make decisions about suspending certain business functions in order to cut costs. If a business is having short-term cash flow problems, they can cut discretionary costs and still keep business operations running. By keeping track of discretionary costs separately, managers can easily see what can be cut without disrupting the day-to-day operations of the business activities.
Certain costs may be considered discretionary to one business, but essential to another. For example, it is essential for a cloud storage company to have an internet connection. However, while a brick-and-mortar retail store may use the internet, the business could run without it. Therefore, the cost of internet would be a discretionary cost for the retail store even though it is not for the cloud storage company.
This is also true in personal finance. A discretionary expense for an individual might be a morning coffee. This isn’t a necessary living expense and although it might be difficult for some of us, we can live without coffee.
Let’s look at a business example.
Example
Brian is the owner of a mid-sized manufacturing company in Denver. Brian is having some issues with his receivables, and therefore has a cash flow problem. He needs to pay his expenses by the end of the month, but there are certain expenses that must go unpaid for now. From the list below, which costs would be considered discretionary for Brian’s business?
- Billboard advertising space
- Employee paychecks
- Electricity
- Quarterly employee training session
The discretionary costs for Brian’s company are billboard advertising space and the quarterly employee training session. Without these, the company can continue its operations in the short term.
Summary Definition
Define Discretionary Expenses: A discretionary expense is an unnecessary expenditure that a business does not need in order to run its operations.
