The terms "discretionary expenses" and "mandatory expenses" refer to two different types of spending found in expense budgets and financial reports. It is important that the accounting department knows the difference between these two expense types, as it affects how the business plans ahead and handles monthly spending. While one type of expense is flexible in terms of decreasing costs, the other is fixed to ensure the business operates as expected.
Discretionary Expenses
The term "discretionary expense" refers to the spending done by a business or person that relates more to personal wants than actual needs. Discretionary expenses change each month, so it is important to track all spending done by a company or person. Examples of discretionary expenses include going out for dinner, buying new office supplies or business cards, and purchasing technological supplies for the office. Discretionary expenses are often called flexible expenses.
Mandatory Expenses
The term "mandatory expense" refers to the spending required to operate a business or household. Mandatory expenses are often the same each month, depending on the individual payment agreements with third-party providers. Examples of mandatory expenses include rent or mortgage payments, monthly utilities or salary payments to employees, tax payments and car payments. These expenses cannot easily be cut out of a budget to save money, as stopping rent, tax or utility payments may have severe legal consequences.
Making Expense Budget
Although both the discretionary and the mandatory expenses are items that fall under spending, the two types of expenses must be kept separate in an expense budget. The mandatory expenses must be listed as fixed expenses, as they do not change much each month they are due. Discretionary expenses are listed separately, as the exact figures may change on a weekly and monthly basis. Keeping the expenses separate in the budget will help cut spending, as it is clear which expenses are needed and which are flexible.
Managing a Budget and Expenses
It is easy to manage a budget and make budget cuts if the expenses are divided into discretionary and mandatory expenses. Discretionary expenses are those that are frequently cut down or eliminated completely, if a business or person needs to save money during a single month or annual quarter. Cutting out mandatory expenses may have severe consequences on a business or person, as they are often rent, utilities, bills and car payments, for example.
