What are discretionary costs and how to manage them?
SG&A (Selling, General, and Administrative Expense) cost management is critical during a crisis to cut costs and keep the business sustainable. The bigger these expenses are, the more money company has to bring in to reach the break-even point. To keep these expenses under control, the management must pay discretionary costs constant attention. In this article, we explain what are discretionary costs and how to get them under control ASAP.
Just like indirect spend, SG&A comes into the management focus during hard times. Part of these expenses is essential. This means that you can’t just cut them without facing legal ramifications or just sinking the ship in record time - e.g. salaries or rent.
Cutting discretionary costs
So the only place where you can cut costs is the discretionary part. In times of turmoil and crisis, discretionary costs are the first place where you can quickly pull back to stay afloat. Discretionary costs (avoidable costs) are costs or capital expenditures that can be curtailed or even eliminated in the short term without having an immediate impact on the short-term profitability of a business. Examples of discretionary costs include advertising, maintenance, training, R&D, etc.
Discretionary costs examples
- Team perks
Quick disclaimer, though - the fact that these expenses CAN be cut, doesn’t mean they’re unnecessary, to begin with. Many, if not most of them can only be reduced in the short-term, not the long-term. You could probably get by without marketing for a month or not providing any training to your employees. Nevertheless, keeping up the life without them can sink the business as effectively as abundant spending.
Think of it like coffee. You definitely CAN just stop buying coffee to your office and no one will die from that. At first. Then your under-caffeinated employees might accidentally kill each other, or even murder you (not so accidentally) and ultimately leave - effectively killing you and the entire business. So don’t skimp on coffee! :)
“...your under-caffeinated employees might accidentally kill each other, or even murder you!”
Deciding how much you can and should cut your discretionary expenses is a balancing act on its own. But in addition to that, discretionary costs fluctuate a lot more than essential spending. Your total salary cost is fairly predictable - expenses on marketing campaigns or travel is much more volatile. All this makes discretionary spend especially hard to manage.
Implementing a spend management system
So where do you start, when it can seem like a spend management minefield? First and foremost you should set up a simple and efficient spend management system that reviews all spending.
With ProcurementFlow you approve purchase requests as well as invoices. This helps the CFO take costs under control ASAP. Approving purchase requests helps reduce unnecessary spending and conserve cash while keeping operations running.
Before any items or services are ordered and obligations are taken for the organisation, the request must first be approved by the management. All requests are registered and sent to management for digital approval. Only if it’s approved, procurement will issue the PO. Later, the invoice must also be approved, as usual.
ProcurementFlow discretionary cost calculator helps you figure out, how much discretionary cost you can avoid by implementing a simple requisition approval process. This cloud-based solution is simple to use and needs no IT-investments to get started. Transition to approving requests in 10 minutes!
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