What Are Periodic Expenses?

An accurate budget is essential for managing cash flow and defining areas where you may decrease business costs. However, creating a budget is not as easy as it seems. You can quickly include regular expenditures you plan to pay weekly or monthly. But what about spending that occurs infrequently, e.g., quarterly or annually? These periodic expenses may bankrupt your firm if you do not plan them correctly. Below, we will analyze how periodic expenses impact your budget and provide recommendations to deal with them.

What Are Periodic Expenses in Simple Terms

These are irregular spending, so you may forget about them. They occur once every couple of months or once a year. Let’s discuss some widespread periodic expenses examples that you must pay attention to:

• liability insurance;
• property taxes;
• memberships in professional associations;
• education;
• professional licenses and certifications;
• bonus payments to employees, etc.

This spending is different from fixed and variable expenses. Fixed expenditures are unchanged each month, e.g., mortgage payments or payroll.

Variable expenditures change depending on the volume of activity or other factors. So, utility bills increase in extreme conditions, and material costs increase depending on production volumes. Periodic costs are often fixed in amount, but their key feature is the term.

Common Types of Periodic Expenses by Business Type

As we can see, periodic costs occur regularly, most often once a year or every 6 months, depending on the business category. Understanding such expenditures simplifies budgeting and financial planning.

• Service businesses. Companies in this sector, e.g., consulting or legal organizations, face periodic expenses, including membership fees in professional associations or industry certifications. Equipment maintenance fees ensure operational efficiency. Other recurring costs include software license fees or educational courses.
• Product-based businesses. Such firms spend money on bulk inventory purchases to replenish goods seasonally or annually. Their periodic expenditures include payment for seasonal exhibitions, advertising, and establishing partnerships. Representatives of the product-based industry must allocate money to provide warehouse lease renewals and machine maintenance.
• Nonprofits and seasonal businesses. Charities or holiday-focused retailers deal with non-standard financial obligations. They need to pay for grant renewals each year. Spending on events, including benefit concerts or seasonal festivals, occurs at least once a year and requires accurate planning.

It is crucial to identify the main categories of periodic expenditures at the start-up stage of your firm to avoid unpleasant surprises.

The Risk of Ignoring Periodic Expenses

Not all business owners understand the consequences of not managing periodic fixed expenses correctly. Below, we will analyze the main challenges that entrepreneurs face.

• Cash flow disruption. Unexpected payments for machine maintenance or software purchases may negatively impact your cash flow if you have not set aside money. Let’s say you forgot to plan the cost of renewing your membership in a professional association. This may force you to forego other payments, which will worsen your financial and operational activities.
• Unplanned budget deficits. Failure to correctly calculate periodic expenditures leads to deficits. Without allocated reserves, the firm is forced to redirect money from other areas, including promotion and product development. This creates financial problems and limits business growth.
• Late fees and missed opportunities. Missing deadlines for renewal of certificates and memberships in organizations can result in fines or interruptions in service. If you miss an important industry event, this will limit your competitiveness and ability to expand your customer base.

You are unlikely to be happy to face such troubles. Do not forget to monitor your expenditures with the special software constantly.

How to Plan for Periodic Expenses

Although such spending does not occur often, you may usually see it coming if you carefully analyze the documents. Let’s discuss a few approaches of how to budget for periodic expenses.

• Utilize forecasting instruments and budget templates. Use special digital solutions or simple Excel budget templates to plan periodic costs. These digital solutions allow you to define irregular spending, forecast your financial needs, and prevent unexpected expenditures. They integrate spending timelines into your financial activity.
• Set aside money monthly in a Reserve Account. Dividing periodic expenses into a monthly “sinking fund”. Let’s say you must make a $6,600 insurance premium. You may set aside $550 from your monthly budget to create a financial buffer without disrupting your cash flow.
• Schedule reminders for payment dates. Create a calendar alert or a dedicated accounting app to monitor license or subscription renewal dates. Payment automation ensures timely transactions to avoid penalties.

Analyze past financial documents to define all periodic expenditures you’ve incurred over the last years.

Bookkeeping Tips for Periodic Expense Management

Now that we know almost everything about such liabilities, it’s time to dive into effective strategies of expense management.

• Categorize spending correctly. Properly categorizing seasonal expenses makes it simpler to track and analyze. So, you can group all annual membership fees under “Professional expenses”. This allows you to quickly evaluate a spending structure and forecast future spending.
• Document frequency and renewal dates. Keep detailed records of expenditure frequency (monthly, annually) and renewal dates. To ensure timely payments, you may utilize calendars or reminders in your accounting software.
• Use accrual accounting to smooth out timing. Accrual accounting allows significant annual spending to be spread over monthly periods. This provides a more accurate balance of cash inflows and outflows, increases transparency of capital movements, and prevents financial shocks.

Any firm should adopt periodic expenditure work to its accounting activities to ensure that its financial statements reflect real liabilities.

Final Words

Insufficient attention to periodic expenses can seriously impact your financial results. Significant unplanned expenses can drain your accounts if you do not plan for them in time. As a result, you will have to take out a loan to cover such spending, which will worsen the firm’s financial stability.

If you have not yet implemented an effective system to deal with such expenditures, contact BooksTime. With proactive bookkeeping support, our specialists help clients control periodic expenses and keep their finances on track.