Definition: Discretionary spending is expenditures that are not essential for the business operation. This term intends to differ what is fundamental and what is not. Discretionary or non-essential spending is any disbursement that could be avoided but the decision-maker discretionally prefers to have it.
What Does Discretionary Spending Mean?
Every business incurs in numerous costs every month but only some of them are absolutely necessary to sustain regular operations. For example, if the company does not purchase basic inputs, the inventory will decrease and production will be stopped at some point in the next future. However, other expenses are discretionary and should exist only when there is available money after paying for the essential items, labor obligations and taxes. That is, when there is discretionary income.
For example, a Sales Manager might decide to pay for a special dinner to reward all sale representatives after an outstanding sale performance. A General Manager might purchase new ornaments for offices when the company’s revenues have reached a record. A proper identification of discretionary expenses facilitates cutting decisions when income falls under expectations.
Example
Anne Winfil recently created a small business to manufacture eco-friendly wood furniture under the Nature is Life brand. She used to pay every month salaries, inputs and materials and the business went very well. Mrs. Winfil thinks that nature should be inside the company to reinforce identification with the brand so the company pays for a lot of fresh flowers to decorate permanently every corner of the layout.
The firm also provides free fresh fruits as daily snacks for her 110 employees. When sales decreased because of problems in the marketing department, Mrs. Winfil was not sure how to manage a reduction of expenses. The Finance Manager then identified essential and discretionary spending. The flowers were limited to the most public spaces where visits regularly stay. The fresh fruits were reduced to a big portion every Friday. Other expenses were temporary eliminated and the company was able to survive the bad times without affecting production capacity or product quality.
