Time spent on business financial planning is well worth it in the
long run. If this list of true expenses puts your usual monthly budget into the negative, pull out that red pen and do some slashing. At YNAB we call those predictable yet somehow unexpected budget burglars (like holiday expenses, annual subscriptions, and car repairs) True Expenses and we have a plan for managing them. These bills cannot easily be changed and are usually paid on a regular basis, such as weekly, monthly, quarterly or from year to year. Variable expenses are more difficult to budget for because they can change unexpectedly. This requires you to be mindful of your spending, so you can stay within budget.

• You could also save on groceries by planning meals, taking advantage of coupons or switching from name brands to generic.
• Ultimately learning how to better manage your fixed and variable costs well can help you increase profitability and even to qualify for small business loans.
• So, the cost of shipping changes depending on how many things are being shipped.
• In a small business, a variable cost is an expense that changes according to production or, in some businesses, with changing weather conditions.

Ultimately learning how to better manage your fixed and variable costs well can help you increase profitability and even to qualify for small business loans. Invest the time to review your expenses to find opportunities to save money and build a financially healthy company. With semi-variable expenses there will be a fixed component
you’ll pay for no matter what your level of production is, but increased or decreased production
will change the cost. Let’s say you have employees that earn
base pay, but also can earn overtime or sales commissions.

Expenses

Once a year, for example, you could ask employees to provide feedback on certain costs. You
may identify software you’re not using, for example, or alternatives that are more cost effective. You may be able to incentivize employees to help you find these opportunities to cut costs.

• Just like consumers, businesses also have variable and fixed expenses.
• With proper planning, even very volatile expenses won’t have to derail your business plans.
• This figure gives you an idea of how much discretionary income — extra income you can spend on other items, like debt repayment or retirement savings — you have leftover each month.
• By getting a handle on your spending, you can free up more money to save or invest in other areas of your life.
• Because variable costs scale alongside, every unit of output will theoretically have the same amount of variable costs.
• On the other hand, variable costs are safer, generate less leverage, and leave the company with smaller upside potential.

Stay with me and we’ll explain why this choice is the secret to mastering your budget. I’m a freelance financial journalist and a regular contributor to U.S. I’ve written for Life + Money by Citi, Bankrate and The Balance, among others. Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

Break Them Down Into Monthly Costs

For instance, if a company purchases a product for $30 and is able to sell it for $50, the company’s cost of goods sold will be a constant rate of 60% ($30 / $50). Therefore, when the company has sales of $10,000 the cost of goods will be $6,000. Officially, a variable expense is a cost that changes month to month or occurs irregularly. Periodic expenses are those costs that are the same and repeat regularly but don’t occur every month (e.g., quarterly). They require planning ahead and budgeting to pay periodically when the expenses are due.

In addition, variable costs are necessary to determine sale targets for a specific profit target. Raw materials are the direct goods purchased that are eventually turned into a final product. If the athletic brand doesn’t make the shoes, it won’t incur the cost of leather, synthetic mesh, canvas, or other raw materials. In general, a company should spend roughly the same amount on raw materials for every unit produced assuming no major differences in manufacturing one unit versus another. Our partners cannot pay us to guarantee favorable reviews of their products or services.

Tips to Reduce Your Business Variable Expenses

Understanding the difference between these costs can help a company ensure its fiscal solvency. Variable costs are directly related to the cost of production of goods or services, while fixed costs do not vary with the level of production. Variable costs are commonly designated as COGS, whereas fixed costs are not usually included in COGS. Fluctuations in sales and production levels can affect variable costs if factors such as sales commissions are included in per-unit production costs.

Variable expenses examples

Variable expenses aren’t always predictable, but they often allow more flexibility in your budget. Many or all of the products featured here about form 1094 are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page.

One of these expense types is called a “variable cost.” This cost only goes up when you produce more stuff. On the other hand, there are “fixed costs” that stay the same even if you do more things within a certain range. Having variable costs is like a safety net for a company because if there’s less demand for their product, they won’t lose too much money. However, it also means they can’t make as much profit as they might have if they focused more on fixed costs. If possible, set aside funds in a business savings account to

cover variable expenses during times when cash flow is tight.

Is Marginal Cost the Same As Variable Cost?

Assume that a website business sells a product and requires the customer to pay with a credit card. The credit card processor charges the business a fee of 3% of each amount charged. Therefore, if the business has sales of $10,000 in the month of June, the business will have a credit card expense of $300. The total credit card expense varies with sales because the fee has a constant rate of 3% of sales. One of the easiest ways to understand how variable expenses work is to consider the weather in your area. During the summer, does it get so hot that you need to crank the air conditioning?