What is a Discretionary Cost?

A discretionary cost is a cost or capital expenditure that can be curtailed or even eliminated in the short term without having an immediate impact on the short-term profitability of a business. Management may reduce discretionary costs when there are cash flow difficulties, or when it wants to present enhanced short-term earnings in the financial statements. However, a prolonged period of reduction in discretionary costs gradually reduces the quality of a company's product pipeline, reduces awareness by customers, increases machine downtime, and may also decrease product quality and increase employee turnover. Thus, discretionary costs are actually only discretionary in the short-term, not the long-term.

An established company is in a better position to slash discretionary costs for a period of time, because it has a firm customer base that probably does not need to have advertising aimed at it. Similarly, an established organization may be able to get away with reduced research and development expenditures for a period of time, since it is already selling a number of products. This is not the case for a startup company, which needs advertising to build a customer base, as well as product development expenditures to build out its initial product line. Consequently, what constitutes a discretionary cost will depend on the circumstances.

Examples of Discretionary Costs

Here are several examples of discretionary costs:

Advertising. Spending on advertisements, digital campaigns, sponsorships, and brand promotions.
Marketing. Costs of social media marketing, Google ads, or printed promotional materials.
Training. Expenses related to seminars, workshops, certification courses, or leadership training programs.
Employee development. Fees for online courses, software tools for skill development, and other educational resources.
Research and development. Costs related to developing new products, experimenting with new technologies, or market testing.
Travel and entertainment. Costs for business travel, conferences, client dinners, or team-building events.
Office improvements. Expenses on non-essential office decorations, plants, artwork, or upgraded furniture.
Outside assistance. Hiring consultants or outside advisors for specific projects, advisory roles, or temporary support.
Charity. Costs related to charity events, sponsorships, environmental sustainability projects, and volunteering programs.
Employee wellness. Costs for employee perks like gym memberships, wellness programs, recreational activities, or wellness retreats.
Memberships. Annual memberships to industry associations, subscriptions to trade magazines, and online resources.
Company social events. Costs for company-wide celebrations, holiday parties, annual picnics, or milestone celebrations.

These discretionary costs often provide value and support for long-term growth, employee satisfaction, or brand image, but can usually be adjusted or postponed if there’s a need to cut costs.