Budget and cut discretionary spending to save your margins

What are discretionary expenses?

Discretionary expenses are non-essential costs businesses can adjust or eliminate without directly impacting core operations. By understanding what these are, you can be more transparent in your budgeting, enabling strategic financial decisions while improving resource allocation.

Let's explore some key areas of discretionary spending:

Travel

Business travel, while valuable for networking and collaboration, is considered discretionary. This includes attending conferences, client meetings, and trade shows. Companies can regulate these expenses through well-defined policies. By implementing virtual meeting technologies, businesses can often reduce travel costs without sacrificing productivity. However, face-to-face interactions remain valuable for building client relationships and closing important deals.

Marketing

Although important, marketing costs like ads, events, video production, and agency fees are also discretionary. While great for brand visibility, the amount that can be spent is at the company's discretion. Digital marketing strategies often offer more measurable ROI, allowing businesses to adjust spending based on performance. Content marketing and social media campaigns can provide cost-effective alternatives to traditional advertising, maintaining market presence even with reduced budgets.

Investments

Discretionary investments like mergers, real estate purchases and R&D projects can impact a business's competitive positioning and trajectory.

 While potentially profitable, they're not essential for day-to-day operations. These investments can drive long-term growth, foster innovation and create new revenue streams. However, balancing these opportunities with financial stability is important, especially during uncertain economic times. Always undertake careful due diligence, consider short and long-term benefits and assess risks before committing to significant investments.

Entertainment-Related Expenses

Team perks fall under discretionary spending. These include office upgrades, equipment allowances, and upskilling opportunities. In today's remote-friendly climate, companies adapt these perks to suit changing work environments. But while these expenses are seemingly non-essential, they can significantly impact employee satisfaction and retention.

Virtual team-building activities and online learning platforms are becoming popular alternatives to traditional office perks. Balancing cost-saving measures while maintaining a positive company culture is key to managing these expenses.

Technology and Software Subscriptions

 In today's digitized age, businesses often accumulate various software and technology subscriptions and services. While many of these tools enhance workflow, some may become redundant or underutilized. Regularly auditing your tech stack can reveal opportunities to consolidate or eliminate unnecessary subscriptions - potentially leading to cost savings.

Consider implementing a centralized system for managing software licenses and subscriptions across departments. This not only helps to identify overlap but also strengthens your position when negotiating rates with software vendors. Exploring open-source alternatives or opting for scalable, pay-as-you-go models can also provide flexibility in managing these discretionary expenses, allowing for better alignment with your business's actual needs and growth trajectory.

How can companies identify discretionary spending?

To identify discretionary spending, you'll need to analyze your financial statements. Start by categorizing expenses as essential or non-essential and look for costs that aren't directly tied to core operations - like marketing, investments, and team perks. You can also:

• Consult Department Heads: Engage with leaders from different departments to gain deeper insights into specific spending areas. This can provide context about the needs and impact of various expenses within each team.
• Benchmark Against Industry Peers: Compare your spending pattern with peers in your industry.  Benchmarking can highlight areas where discretionary spending might be higher than the industry average.
• Leverage Spend Management Software: Implement AI-powered tools like Aspire's expense management to streamline how you identify discretionary spending. Our expense management platform is feature-rich with services like automated receipt tracking and real-time spend tracking - helping you reduce errors while saving time on administrative tasks. You can also integrate with accounting platforms like Xero to synchronize card payments, employee claims, and uploaded photos of receipts with just a click of a button.
• Conduct Regular Expense Reviews: Set up a system to periodically review your discretionary expenses. You can set this up to be monthly, quarterly, or as frequent as needed based on your business size and spending patterns.
• Analyze ROI of Discretionary Expenses: For each identified discretionary expense, evaluate its return on investment. This can help you determine which expenses add value to your business and which might be unnecessary.
• Prioritize Cost-Saving Opportunities: Based on your analysis, list areas where discretionary spending can be reduced without negatively impacting your core business operations or employee morale.
• Develop Clear Spending Guidelines: Establish and communicate clear policies for discretionary spending across the organization. This ensures all employees understand the company's approach to managing these expenses.
• Monitor and Adjust: Continuously monitor the impact of your cost-saving measures and be prepared to adjust strategies as needed. This lets you maintain operational efficiency while optimizing resource allocation.

Why can cutting discretionary spending preserve your margins?

Cutting discretionary expenses can significantly boost profit margins. One effective strategy in today's competitive landscape is to carefully identify and reduce non-essential expenses. To illustrate, let's look at a hypothetical scenario for a mid-sized company. The table below shows various discretionary expense categories, current annual spending, suggested reduction percentages, and the resulting savings:

‍

Let's break it down:

• Strategic Reductions: The table suggests targeted reductions in each category, ranging from 15% to 60%, based on the nature of the expense and its importance to daily operations.
• Substantial Savings: By implementing these cuts, the company could save $505,500 annually, representing about 32% of the total discretionary spend.
• Operational Impact: The "Impact on Operations" column helps decision-makers understand the potential consequences of each cut, ensuring that vital functions aren't compromised.
• Biggest Saving Opportunities: Travel & Entertainment and Facility Improvements offer the largest potential savings, with $120,000 each. These areas often have significant room for optimization without severely affecting core business activities.
• Balanced Approach: While some categories like Marketing & Advertising see smaller percentage cuts, they still contribute significantly to overall savings due to their larger budgets.
• CAPEX Consideration: While this analysis focuses on operational expenses, careful management of capital expenditures (CapEx) can also preserve margins. By prioritizing essential investments and deferring non-critical ones, companies can optimize their finances even further.

Companies can preserve and even increase profit margins by analyzing and adjusting discretionary expenses. For instance, if this hypothetical company had an annual revenue of $10 million with a 10% profit margin ($1 million), implementing these cost-cutting methods would potentially boost profit to $1,505,500 – a 50.55% increase in profitability!

How can Aspire's expense management system help?

Aspireapp's expense management system offers powerful tools to control discretionary spending. It provides real-time visibility into expenses, allowing you to track and analyze spending patterns. With automated categorization and customizable approval workflows, you can easily identify and manage discretionary costs. The system's reporting features also help you make data-driven decisions, ensuring optimal resource allocation and preserving your margins.

Aspire's corporate cards also offer attractive cashback rewards on business expenses, effectively lowering overall costs. By using these cards for regular purchases like office supplies, travel or digital subscriptions, you can accumulate rewards and savings over time. 

Conclusion

Navigating today's economy calls for a sharp eye on spending, especially when it comes to costs that aren't make-or-break for your business. By getting a handle on these discretionary expenses, you can fine-tune your budget and keep your company on solid financial ground.

In the end, it's all about making smart choices. By keeping tabs on where your money goes and zeroing in on areas where you can cut back, you can position yourself to weather any financial storms that come your way. With Aspire AI, you can transform financial management into a strategic advantage, leveraging real-time insights to make informed decisions that drive growth while maintaining economic stability. With these tools in your arsenal, you're well-equipped to boost your bottom line and keep your business thriving, no matter what economic challenges lie ahead.