If a business only had fixed, recurring expenses from month to month, budgeting and financial planning tasks would be relatively straightforward.
However, most businesses will incur infrequent business costs throughout the year that require extra planning and preparation, like quarterly tax payments or annual insurance premiums.
Even though these expenses aren’t entirely unexpected, they can still create temporary liquidity issues or financial strain if the business is not adequately prepared for them.
In this guide, we’ll take a closer look at periodic expenses, including common examples and helpful tips on how to manage them effectively.
Periodic expenses definition
Periodic expenses are business costs that occur infrequently throughout the year. These differ from business expenses that occur month after month, like rent, utilities, and payroll.
A defining characteristic of periodic expenses is that they are infrequent, but predictable. This means businesses expect to incur periodic expenses at some point each year, though they don’t arise each month. As such, periodic expenses are typically due on a quarterly, semi-annual, or annual basis.
Additionally, periodic expenses are not directly tied to production. Their amount is independent of activity levels, and they are recognized in the period that they were incurred.
Like other types of expenses, periodic expenses appear on the income statement, impacting the company’s overall profitability in a given period.
Examples of periodic expenses
Being aware of some of the common types of periodic expenses makes it easier for teams to identify and plan for these costs. Some typical periodic expense examples include:
- Annual software licenses: Teams should closely monitor the renewal dates for any software they pay for annually. Annual billing often comes with cost savings, though the once-a-year charge can take a business by surprise if they’re not prepared for it.
- Equipment maintenance: Teams may schedule preventative servicing and maintenance on equipment once or twice a year to keep machines in good working order. Though this can help prevent unexpected maintenance costs, it’s something teams must budget for to avoid a short-term pinch in cash flows.
- Business license renewals: Certain team members may need to renew their professional licenses on a regular basis. Businesses should take note of how many employees will incur these annual fees and include the total cost into the annual budget.
- Tax payments: Depending on the business’s legal structure, it may owe quarterly estimated tax payments. These payments can be quite substantial, and may create financial strain if the business is not setting enough aside throughout the period.
- Insurance premiums: The business may carry general liability insurance, with premiums due once or twice a year. If teams don’t plan for these premium payments ahead of time, they may find themselves temporarily short on cash afterward.
Benefits of effective periodic expense management
It’s one thing for businesses to be aware of the periodic expenses they will incur throughout the year.
It’s another thing to proactively create a financial plan to help avoid disruptions when these expenses arise. Here are some of the top benefits of effective periodic expense management:
Improved cash flow and financial stability
Possibly the biggest benefit of effective management is that teams are more prepared to pay for periodic expenses without a big disruption to cash flows.
By nature, some periodic expenses are large, one-time payments, so it makes sense why unprepared teams could face a financial emergency after covering the expense.
Instead, having a clear idea of when periodic expenses are due and about how much they’ll cost allows teams to prepare themselves financially throughout the year, with less of a sticker shock when the expense comes due.
This way, teams can continue on with business as usual rather than reallocating funds away from certain functions to cover the cost of the periodic expense.
Increased ability to save for future goals
Having a handle on periodic expenses enables teams to engage in more accurate strategic planning and growth initiatives.
If the company has periodic expenses baked into the yearly budget, it’s better able to use excess capital for further growth and expansion rather than covering large periodic expenses when they arise because the team wasn’t prepared for them.
Reduced financial stress and better planning
Teams that have adequately prepared for their periodic expenses and have the necessary cash on hand will feel less financial stress and organizational strain.
For instance, if the end of the quarter is approaching, and the team has already set aside a portion of all sales for taxes throughout the period, making the estimated quarterly tax payment won’t be a large financial burden.
How to effectively incorporate periodic expenses into your budget
Despite their predictable nature, effectively planning for periodic expenses can sometimes be challenging for businesses.
Here are some helpful tips for budgeting periodic expenses:
Identify historical patterns
The first step is to examine the company’s past financial records to determine the types of periodic expenses they typically incur, their frequency, and amount. Doing so can give the company a better picture of what they can expect to incur in the future.
For example, a law firm might look at its previous year’s books and see that it paid quarterly estimated tax payments, semi-annual insurance premiums, annual professional dues, and software licenses with annual billing.
All things being equal, the firm can expect to incur the same types of expenses in the current year, giving them a good starting point for budget-planning.
Make necessary adjustments
Using historical data, make any necessary adjustments based on new assumptions or operational needs.
For instance, maybe the firm plans to implement a new software solution that is more expense than the current tool. In this case, the team would need to account for the increased cost in the new annual budget rather than go off the historical amount.
Calculate annual and monthly costs
With the list of expected periodic expenses and the estimated amounts for each, the team can add them up to get their total annual cost.
From there, dividing the annual cost by 12 will give the company an idea of how much they’ll need to set aside each month to cover periodic expenses as they arise. The finance team can incorporate this figure into the budget to account for periodic expenses.
Add a buffer
It’s best practice to add a slight buffer to the annual budget amount to account for any discrepancies in the projected amounts.
This way, even if periodic costs increase modestly, the team is prepared to cover the full expense without scrambling to scrape up the necessary funds.
Strategies for managing periodic expenses
Once the budget is in place for periodic expenses, these are a few helpful tips for teams to monitor and manage these costs on an ongoing basis.
Track spending
Even though the budget provides a good estimate of what periodic expenses might look like for the year, teams still need to monitor these expenses as they come up to ensure they’re recorded accurately in the books.
This also helps teams gauge budget variances and make tweaks for future planning periods as needed.
Use automated tools
Rather than track spending manually, teams can improve their workflows by using an automated expense tracking system.
It’s particularly useful for growing teams who need a way to track and categorize expenses at scale. When implemented, they can easily exclude recurring expenses to isolate and analyze periodic costs.
Simplify expense tracking with BILL
With BILL, you can automate expense management and track transactions details automatically and manage all business expenses from one convenient platform.
Frequently asked questions
What are examples of periodic expenses?
Common periodic expense examples include annual insurance premiums, annual or quarterly software renewals, annual professional association dues, business license renewals, preventative maintenance, and tax payments.
How do periodic expenses differ from fixed expenses?
Periodic expenses differ from fixed expenses in that they occur infrequently throughout the year. Fixed expenses are typically the same amount from month to month, including rent or mortgage payments, loan repayments, and salaried wages. Periodic expenses are predictable and expected to arise each year, though they are incurred less frequently than fixed expenses.
Why is it important to track periodic expenses?
It is important for businesses to track periodic expenses to support healthy cash flows and financial management practices. It helps businesses prepare for sizable expenses that they expect to incur each year, avoiding temporary liquidity problems or operational disruptions if they’re unable to make the payment.
How can I budget for periodic expenses effectively?
Effectively budgeting for periodic expenses starts by taking a look at historical trends to determine the typical frequency and spend amount. From there, consider any expected seasonality or adjustments for future periods, and start to calculate how much they will cost annually. With the total annual spend amount for periodic expenses, teams can calculate how much this equates to each month, helping them allocate the proper amount to avoid a surprise expense when it arises.
