Are you setting your small business up for success in 2019? One of the biggest mistakes businesses make is in their budget planning. How do you plan for those expenses that change each month? If you want to bring more financial success to your business in 2019, you need to create a budget that plans how much money you’ll need to cover your costs.
Variable expenses can create an issue for your budget because they are difficult to predict from month-to-month. As the name suggests, they rarely stay the same. The best business goal is to minimize costs, gather tools, and create a strategy that prevents your business from being buried by unexpected costs. The first step to keeping variable expenses under control is to understand them. Let’s take a closer look.
The Ins and Outs of Variable Expenses
Variable expenses change from month-to-month. That’s because these are the costs that depend on how much you use a product or service. Variable costs are usually viewed in one of two ways.
Operating costs include everything you need to pay to keep your business running. Utilities, auto expenses, office supplies, and hourly professional services are examples of operating costs.
Costs of goods sold are the dollars spent on materials, labor, and sales commissions. As your production and output increases, so do cost of goods sold because you spend more money on materials, commissions, and direct labor costs.
Variable costs generally change every day. Fixed costs, on the other hand, don’t change at all. You can easily budget these costs because you know exactly what to expect from month-to-month. Fixed costs include rent, insurance, loan payments, subscriptions, and employee salaries.
Outside variable and fixed costs exist discretionary costs. These are a little trickier. While you don’t always have to budget for these, they are the costs that you accrue when you have some extra money to afford extra expenses. A great example of a discretionary cost is planning a party for your staff to boost the morale after a big sale.
Variable Expenses and Your Budget
In many ways, variable expenses can’t be planned for in your budget. Because variable expenses are tied to production costs, they pretty much control themselves. If the production rates are high, costs are also high and vice versa.
Overhead variable costs are even harder to adjust or plan for, since they are dependent on the year or month. Air conditioning and heating bills are examples of overhead variable costs because they spike and dip each year depending on the weather. For example, a long, cold winter may do a number on your budget because of extra expenses for heating.
Once you understand the ins and outs of variable expenses, and what you can and cannot control, you can do your best to get ahead of variable costs so that you won’t exhaust your budget on unexpected costs.
Don’t Let Variable Expenses Sink Your Budget in 2019
Try these tips to get ahead of variable expenses and prevent them from negatively impacting your numbers from month to month.
1. Enter into a fixed payment agreement for your utilities.
Talk to your utility service providers about fixed payment arrangements. Rather than paying a variable rate, you can agree on a fixed rate that is easier to predict each month. While you may end up paying a few dollars more in the long run, your budget will thank you without the uncertainty hanging over it every month.
2. Invest in tools to lower costs.
Most electricity companies offer free assessments to identify areas of your house that may benefit from changes for more efficient energy use. Smart thermostats are an example of a tool that requires an upfront investment but helps keep costs down over time.
3. Average things out to get a close prediction of costs.
When you look back on the previous years, you can average out the variable costs to create a close prediction of what the expenses may be. While some months may be more or less, you can get a general idea by looking back at the past. If you do use an average, be sure to take the highest amount to give yourself a buffer in case costs are high.
4. Create a little cushion.
Speaking of a buffer! Once you have a decent estimate, add a cushion to protect your budget in the event that the variable costs fluctuate drastically. Plan for 3-5% of the total amount you spend on variables. This way you plan for price increases and other anomalies. If you don’t use the cushion, let it roll over from year to year. Try not to move it into discretionary funds as you may end up hurting yourself in the long run!
5. Keep a running comparison of estimates to actuals.
Always go back and compare your estimates to your actual spending. If you were way off with your estimates, you’ll need to re-evaluate the following year.
6. Create a variable expense savings account.
If you end up with extra money at the end of the year, deposit it into a savings account. Don’t count your cushion. These savings can help with spikes the next year. You can also plan this month-to-month so that you have an emergency savings account to dip into if you have an off month.
Now that you understand what goes into variable expenses and have a bit of knowledge on how to better predict them and incorporate them into your annual budget, you are on the right track to better outcomes in 2019. Remember, use our 6 helpful tips to keep your variable costs from sinking your budget this year. For any questions about how to estimate variable expenses, or create a strategy to improve your budget for 2019, contact your financial advisor for help.