What is a discretionary expense?
Expenses, whether for potential audits or to save money.
The term discretionary expense indicates a cost that is not essential to the functioning of a business or organization. In a corporate or organizational environment, this kind of expense is associated with improving standing with customers, clients, and/or employees, and is often considered important for long-term profitability.
However, it remains a type of spending that is not strictly necessary, meaning that the business could still function even if all discretionary spending stops. A business or organization has the “discretion” or choice when it comes to this kind of expense, for example, meals at restaurants or entertainment costs. It is important to have an efficient system for filing and tracking these and other kinds of expenses.
Difference between discretionary spending & essential expenses
The main difference between an expense that is “discretionary” and one that is “essential” is that the former is not essential for the day-to-day operation of a business (i.e. dinner) and the latter is (i.e. office rent).
Tracking both kinds of spending or expenses is important for healthy accounting. When it comes to this kind of tracking, a business or organization must have an overall expense policy: system and protocols in place so that the relevant parties (employees, clients, etc.) know what types of expenses they can file and how to do so.
There are many different kinds of expense or spend management solutions and tools available, including those that are automated or AI-driven, which allow the organization to more easily sort and approve expenses; run reports; and and perform analyses on spending.
Types of Discretionary Expenses
In the corporate sphere, discretionary expenses are usually related to a company’s standing or clout, and can be applied to employees and/or clients. Often, this type of spending is related to a company’s long-term profitability. However, what is considered discretionary or nondiscretionary (i.e. essential), is subjective and may vary from business to business.
Types of discretionary spending include:
- Vacations and other travel expenses
- Automobiles and related expenses
- Restaurants and beverages (coffee, alcohol, etc.)
- Leisure and entertainment-related expenses (like concerts or shows)
- Hobby and sports-related expenses (like gym memberships)
What is an example of a non discretionary expense?
A nondiscretionary, or essential expense is an expense directly related to the operation of a business or organization. This may include but is not limited to the following:
- Office supplies and equipment
What defines an expense as discretionary or non discretionary is subjective and also dependent on the sector. For example, while paying for gas may not be considered essential in the restaurant industry, it could be considered essential for logistics or shipping companies.
How important is discretionary spending?
Spending in this way can be intrinsically connected to workplace morale and/or a company’s standing in its sector. In some industries, maintaining a certain level of discretionary spend may help maintain a company’s reputation and therefore help it to keep or attract clients, ultimately increasing profitability in the long run.
Although often taken into consideration for a company’s long-term profitability, this type of spending can often be restricted or postponed in a current period. In fact, discretionary costs are often the first place an organization looks to pull back on.
Have any questions and do you want more? Don’t hesitate to contact the Jenji team at firstname.lastname@example.org.