What is Discretionary Spend and Why Does It Matter?
Do you know how much of your company’s budget goes toward discretionary spend? If not, you’re in good company—25% of the business owners and managers we polled recently had “no idea” how much of their budget goes toward discretionary spend.
What is discretionary spend?
Discretionary spend falls outside of fixed costs like payroll and rent. It typically happens at the employee level, not at the company level. It includes things like travel, meals, entertainment, subscriptions, and office supplies.
This kind of spending is discretionary because it involves some amount of choice. Is it better to travel to your remote office for an all hands, or call in? Is it worth calling on that prospect one more time this quarter, or not? Should we splurge on a larger booth at the next trade show? Do we want to increase online advertising?
Why does it matter?
These kinds of expenses often don’t seem like a big deal when you consider them one by one—especially when compared to big-ticket items like salaries or office space. But when you add them all up, they have a surprisingly big impact on your bottom line—and the bigger your sales team, the bigger the impact. All told, discretionary spend can make up 25% or more of your company’s spending, which is —a pretty big number. It’s also the easiest area for companies to exert short-term controls to manage cash flow. If you find yourself struggling to make your budget numbers, discretionary spend is a strategic place to focus.
Challenges and Trends
One tough thing about discretionary spend is that it’s hard to see. It’s a collection of small line items across multiple departments and cost centers, which makes it difficult to track and manage.
Another trend to be aware of is that discretionary spend is on the rise as employees make more and more purchases from their own mobile devices and accounts—an Uber here, an AdWords campaign or an Amazon Prime order there. And as a company grows, it gets harder to track—in our recent research, companies between 100 and 500 employees were most likely to say they had no idea how much discretionary spend they had.
Strategies and Solutions
How can you get a handle on discretionary spend? Here are a few ideas.
Track: A first step is to figure out how much of your budget actually is going to discretionary spend. Add up anything in your budget that’s not a fixed cost. You might need to move line items around or total them up in a different way than you’re used to. You can also take a look at your past few quarters to see if your discretionary spend is increasing or decreasing, and add it to your key performance indicators (KPIs).
Communicate: Have an open conversation with your team about discretionary spend—what it is, and how it affects the business. Helping employees see the link between the everyday choices they make and the bottom line paves the way to getting your entire team to think more strategically. And if you find that your discretionary spending is on the high side, you can involve your team members in creative solutions to bring it down.
Formalize or fine-tune: Based on your findings, you might need to establish or make changes to your policies and processes. In our companion survey, two-thirds of employees look for ways to save the company money and follow spending policies conscientiously, so giving them clear guidelines and explaining the “why” behind them help build a sense of shared mission.
Analyze: Once you have a handle on your discretionary spend baseline, you can start assessing how much of it is productive by helping you close deals, understand your customer more deeply, or deliver faster. You’ll also identify some unproductive spend that’s not getting you closer to those bigger goals. This could take the form of recurring expenses or pricey color printouts that get dumped in the recycle bin at the end of a trade show. Elevating the conversation around productive vs. unproductive spend helps your whole team adopt a more strategic mindset.
Empower: After all, you don’t want to create an environment where all spending is a bad thing. There are absolutely cases when employees should exercise their discretion to seize opportunities or accelerate growth. Talk about real scenarios and trade-offs as a team to ensure the business’s high-level priorities are clear and help everyone make smart, strategic spending decisions.
To the point: Understanding your company’s discretionary spend, analyzing how productive it is, and empowering your team to evaluate it against strategic priorities can have a big impact on your bottom line.
Have a tip or insight about discretionary spend to share? Drop us a line at email@example.com.