14 Examples of Variable Expenses That Will Help You Budget for Your Business
By Brett Farmiloe
Keeping your budget in check and staying on top of your variable expenses is essential to running a profitable business. So that you know which items in your budget should be categorized as variable expenses, we asked business leaders to share their insights.
Variable expenses in your business
1. Commissions
"Commissions are one important example of a variable expense in business. While you can estimate with some level of accuracy how much business your sales teams will bring in, there is no 100% guarantee of when big deals will land. The commissions you pay sales team members can vary greatly from year to year and quarter to quarter, and if you are an emerging business these numbers can be even trickier to predict.
"To control variables, some companies put tight caps on commissions; however, this gesture can discourage salespeople and result in lower profits. You can study industry averages and company history to predict commissions, and rest assured that lower quarters will cancel out high quarters. Another idea is to offer sales bonuses based on different metrics each month, to encourage sales folk to continue building their skills and avoid overspending on one single competency."
—Tasia Duske, Museum Hack
2. Affiliate commissions
"We are an e-commerce online dental lab. One of our largest variable expenses is affiliate commissions that we pay out every month. We work with a few websites that market products. If a customer clicks on that product link and orders from our website, we offer a commission back to that website in exchange for the sale. We pay the amount of commission based on how well an outside website advertises our product and how that converts to sales. The amount of commission fluctuates dramatically in some months.
"The good thing about this variable expense is if we are paying more it’s because our affiliate marketers are doing a good job and we are getting more sales. We do still have to budget it into our monthly expenses to make sure we have enough assets available to pay our affiliates at the end of the month. If our affiliates don’t get paid on time, they could drop us and work with a different company."
—Evan McCarthy, SportingSmiles
3. The cost of employee development
"Prioritizing employee development and marketing investments produces long-term growth and success. One variable expense often overlooked yet crucial in business is investing in employee training and development. Creating opportunities for employees to improve their skills and knowledge increases their productivity and overall job satisfaction. In turn, this can result in a boost in revenue for the company. It's essential to keep in mind that variable expenses should not be cut without careful consideration of their impact on the success of your business."
—Ryan Rottman, OSDB Sports
4. Shipping costs
"Cost of shipping is the amount of money that a company incurs in selling its product and distributing it to customers, or the cost incurred in procuring raw or packing materials from outside. For companies that offer free shipping to customers, shipping may be their most variable cost as shipping costs can vary depending on the distance items are shipped. For example, if a customer is located outside the country and your company offers free home delivery, then you will definitely have to pay more as the shipping cost will also include taxes, etc."
—Edward Mellett, Wikijob
5. Bank and card fees
"Credit card and bank fees are important variable expenses in business. Credit card companies and banks charge businesses for the use of their products and services, and these fees can add up quickly. For example, a business that accepts credit cards may be charged a fee for each transaction, and a business that has a checking account may be charged a monthly service fee. While these fees may seem small, they can add up to a significant amount of money over time. As a result, it is important for businesses to carefully consider their credit card and bank fees before signing up for any new accounts."
—Lorien Strydom, Financer.com
6. Contract labor costs
"We employ anywhere from 500 to 800 independent contractors at any given time, and consider independent contractors to be a necessary but variable expense. Depending on demand, like other businesses, we need to contract individuals on a short-term basis to ensure continuity of service. This is especially true for seasonal businesses, which can anticipate large variations in their contractor expenses from season to season. On top of the demand-based variation, contractor rates may shift from individual to individual, and you may not have a choice but to hire talent at premium rates to fill those gaps in your workforce."
—Volodymyr Shchegel, Clario
7. Energy costs
"In my business, energy has gone from being a pretty reliable expense to becoming an unpredictable one. The situation in Ukraine has resulted in highly fluctuating heating and power bills. This last month's power bill was triple what it was last year, and there's no telling when the price will stabilize. We've already had to write to our customers twice this year to explain the situation to them and let them know that we're raising our prices soon. Luckily, people generally understand the whole situation and accept the price increase."
—Holger Sindbaek, Online Solitaire
8. Cost of packaging and supplies
"Variable costs include things like the money spent on raw materials and other supplies required in production and packaging, which fluctuate with the number of goods sold. When production volume drops, a corporation may decide to cut back on the number of packaging materials it uses. In the event of a decline in sales, it might also result in a reduction in the number of packing materials required.
"Bags, twist ties, foils, boxes, and plastic wrappers are all examples of supplies and packaging materials. Supply and packaging materials are where most companies begin when calculating their return on investment. It may cost twice as much for a corporation to pack 3,000 cupcakes as it does for 1,500, for instance, if the company spends $300 to pack the former. It follows that selling 3,000 cupcakes rather than 1,500 cupcakes will generate more money."
—Daniel Foley, Daniel Foley Consultancy
9. Delivery costs
"A variable expense will fluctuate in response to production or sales volume. This means that the more you produce or sell, the greater the expense will be. Costs associated with labor, raw materials, and utilities are obvious examples, but just as important is the cost of delivery.
"Delivery costs come in various forms—they may involve commissioning a delivery driver, sending packages overseas, or even renting a fleet of delivery vehicles. Every customer expects prompt and timely delivery of their products, and this means that for a business to be sustainable, investing in a consistent and high-quality delivery service is necessary.
"As these costs vary based on the volume of orders you receive, as well as your proximity to each customer, it tends to make them harder to predict. As such, some variance must be accounted for when managing variable expenses and calculating a product's profit margins. This allows for the most accurate forecasting of your business's growth."
—Andrew Gonzales, BusinessLoans.com
10. Utilities and energy costs
"In manufacturing businesses, energy and utilities are variable costs that determine how expensive it is to run a business. The cost of electricity, gas, and other utilities may be included in a business's overhead expenses. It's important to reduce these expenses as much as possible so they do not end up costing you more than they need to.
"Some businesses have the option of installing solar panels or other forms of renewable energy. This can end up reducing the monthly electricity bill and may even bring it down to zero. In addition to solar panels, businesses can install other energy-efficient equipment, such as LED lights, energy-saving appliances, and Energy Star rated devices.
"Another variable cost is the cost of transportation. This includes the costs of using a delivery vehicle to bring products to customers. For businesses that deliver products to customers, it's important to find ways to reduce transportation costs."
—Luciano Colos, PitchGrade
11. Cost of production supplies
"Production supplies, in my opinion, are the indirect raw materials that are required during the process of manufacturing or assembly. One such example is the oil that is used in machinery, which might be difficult to gauge based on how frequently or how much the devices are utilized. It is possible to classify the cost of machine oil as a variable cost due to the fact that its price changes depending on the amount of output produced."
—Nely Mihaylova, Scooter Guide
12. Hiring costs
"I have found that businesses often understate hiring costs. There are many costs that go into hiring, especially when finding the perfect fit for the position. The standard things involved are just that: expected. The hidden variable cost is when an employee requests a perk, or you need to make room for a specific need. These costs are not always noticeable at first and may be a reason to reevaluate the potential person within the role due to the company being unable to afford or meet expectations.
"This is a complex discussion that varies case by case, company by company, but is important to take into consideration when looking to enter a growth phase of your business. This would mean hiring multiple people could be in the near future, and a budget needs to be determined. Ultimately, I would encourage contracts and written agreements to follow. This can help you to understand all costs involved and keep track of what you have committed to."
—Mark Anderson, Consumer Consulting Group
13. Salaries
"Salaries and wages are often considered one of the most important variable expenses in a business. This is because they can fluctuate widely depending on factors such as company performance, employee productivity, and market demand. For example, if a company has a great year and earns substantial profits, it may decide to increase salaries in order to retain top employees. On the other hand, if a business is struggling and faces financial difficulties, it might have to reduce employee pay, or even lay off workers, in order to stay afloat."
—Martin Seeley, Mattress Next Day
14. Cost of raw materials
"There are many essential variable expenses in business, but one of the most important is likely to be the cost of raw materials. Raw materials are the inputs that are used to produce a finished product, and their prices can fluctuate greatly depending on market conditions. For example, the cost of steel may increase sharply if there is a shortage of metal, while the cost of oil may decrease if there is an oversupply. Businesses must carefully track the costs of their raw materials so that they can adjust their prices accordingly and remain profitable."
—Benjamin Okyere, Stress Reliever Club
