Sunday Jan 29, 2023

Expense Management: What is a Variable Expense? – Nav

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Running a successful business isn’t just about bringing in more sales. Managing your business expenses is also key to profitability. Your business expenses likely include fixed and variable expenses, as well as expenses that are a mix of both types. 

While managing all your business expenses well is important, here we’ll focus primarily on variable expenses, which may offer opportunities to save money quickly. 

Business Budgeting 101 Variable vs. Fixed Expenses

Fixed expenses are costs that are not directly tied to sales. You’ll incur those types of expenses regardless of whether sales increase or decrease. 

Variable expenses, on the other hand, are related to sales volume. These costs may increase or decrease depending on production. This can be the case whether you run a service business or a business with physical products. 

In addition, you probably have semi-variable or semi-fixed costs, which are a combination of both. 

What Are Some Examples of Variable Expenses?

Examples of variable costs may include:

  • Raw materials
  • Production supplies
  • Packaging
  • Shipping costs
  • Hourly wages or overtime
  • Commissions
  • Credit card fees
  • Website hosting fees
  • Email service provider fees
  • Advertising
  • Office supplies

Some costs may be fixed or variable, depending on the business. Utility bills may be an example. A service-based business may have relatively predictable utility costs for heating or cooling the office, for example, while utility costs may be much more variable for a manufacturing business.

What Are Fixed Expenses?

Fixed expenses are just as they sound: fixed amounts that must be paid regardless of how much you produce or sell. Examples include rent, insurance premiums, loan payments, equipment leases, or property taxes. These expenses are often referred to as “overhead.”

That doesn’t mean fixed expenses can’t change. Costs can go up, or you may be able to negotiate a discount or find a cheaper option. But the cost generally remains the same regardless of whether production changes. 

What Are Semi-Variable Expenses?

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. An example could be labor costs. Let’s say you have employees that earn base pay, but also can earn overtime or sales commissions. The base salary would be a fixed expense while the commissions or overtime would be variable expenses that vary with production level. 

Another example would be an SaaS product that charges a base amount on a monthly basis but charges more when the number of users or usage exceeds a specific amount. Examples here could include business appointment software used by the sales team, or website hosting or email hosting services. 

How Do I Budget for Variable Expenses?

Budgeting for variable expenses is more tricky than budgeting for fixed expenses, because they can change. The first thing that’s helpful to do is to review your expenses to identify which ones are fixed expenses, semi-fixed expenses, or variable expenses. 

Variable expenses …….

Source: https://www.nav.com/blog/variable-expenses-management-1460029/

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