What’s a Variable Expense?

As a small business owner, you’re probably all too familiar with expenses. However, you might not realize that there are distinct types of expenses—especially when categorizing for accounting purposes. This guide will walk you through variable expenses and why understanding this type of expense is important for running a successful business.

Defining a Variable Expense

A variable expense is a cost to the company that changes frequently. While the expense itself—such as an electricity bill—will need to be paid monthly, the exact amount can fluctuate. A variable expense may also be called a dynamic expense.

A variable expense is the opposite of a fixed (static) expense: one that remains constant, like an internet bill or rent payment.

What Are Some Common Variable Expenses?

Each business has its own unique variable expenses, but a few common examples include employee payroll and bonuses, marketing costs, electricity costs, and materials expenses. 

Any expense that doesn’t have a set rate is considered a variable expense.

Can You Predict Variable Costs?

While the nature of variable expenses is uncertainty, which can make them hard to predict, you can—and should—budget for variable expenses.

For example, a store owner in the mall knows that business will be busier during the holiday season. This owner can estimate that payroll costs for the month will increase because they’ll need more workers on hand and potential overtime to meet demand.

How Do You Predict Variable Costs?

The process of estimating future expenses for a business is called forecasting. Accountants will look at current spending trends and budgets from previous years to estimate how much a business will spend on variable costs. 

For example, an accountant forecasting for August might increase the budget for utilities like electricity based on the air-conditioning bill from July. 

Forecasting reports are never exact, but they can help a company to budget for some costs and prepare for higher or lower expenses. 

Understanding your fixed and variable costs can help you to set a budget and ensure your business is profitable.