Fixed expenses are known, and often they are the ones that businesses focus on because they are the big ticket items. Staffing costs, rent, insurance, vehicle or machinery leases, etc. When we are cost cutting it is these items that we look to see how we can reduce the costs.
However, what many businesses often forget about is the variable expenses. They can be the frivolous amounts that we spend which add up over time and can make a significant difference to our bottom line. They can also be unexpected expenses that blow the budget and leave us with less cash flow than anticipated.
There are a few different types of variable expenses.
- There are those relating to your operating costs such as utilities, car usage expenses such as fuel, office supplies and professional services.
- There are also those costs associated with cost of goods sold. These are directly related to your production. As output increases so do these costs in raw materials, sales commissions and labor costs.
- There are also discretionary costs, these you have a bit more control over as they are the ‘nice to haves’, these are the expenses that you spent when you have some discretionary funds available such as staff bonuses and Christmas parties.
How do we account for these variable expenses in our budgets so that we don’t end up with an unpleasant surprise?
Here are our top tips on dealing with variable expenses.
1. Fix costs where practical
You can work with your suppliers to charge you a fixed amount rather than a variable amount. You might be paying a little bit extra per month for these sorts of deals, but it will guarantee the expenditure for your budget.
2. Review past variable expenses
Review the previous years expenditure on variable costs, or if available the past several years. This will give you an idea of a baseline that you could budget for each month when preparing a budget for the coming year. If you have seasonal variations then consider following this pattern in your budget.
3. Add some fat
Once you have a guide to how much you have spent previously on variable expenses go ahead and add some fat to this. We suggest adding an additional 3-5% on top of your estimate. This will help account for price increases and unexpected anomalies.
4. Track performance
A budget is not a set and forget. It is important when setting a budget that you then review your budget against your actual spending each month. This gives you an opportunity to review your progress re forecast if you are off track from your budget.
5. Money on hand
It is important that you have money on hand when you do have variable expenses. You can either create a bank account that you put your monthly budget for variables into so that you can draw on this as needed. Alternatively you could consider a business line of credit that you can use in emergencies.
While variable expenses can be difficult to plan for, you can still have a plan for dealing with them. This plan can ensure that when these variable expenses occur it isn’t going to be crippling for your business.