You can budget for non-recurring expenses by:
- Identify your recurring expenses
- Identify your non-recurring expenses
- Estimate your non-recurring costs
- Save for future projects
- Create room in your budget
- Create an emergency fund
- Adjust your monthly spending
- Make annual adjustments to your budget
It's easy to plan for regular, recurring expenses in your business. But how do you make room in your budget for one-time or irregular expenses? Non-recurring costs can include things like equipment upgrades, repair costs, or a new marketing strategy. Learning how to budget for non-recurring expenses is good business practice, and it will help you keep tighter control over your cash flow. Here are some tips for handling non-monthly expenses.
8 steps to budget for non-recurring expenses
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Recurring expenses are those that stay the same from month to month. Your monthly budget likely includes space for things like insurance premiums, rent or lease payments, and other bills you pay regularly. But non-recurring expenses are those that you don't necessarily have a plan for.
How do you budget for non-recurring expenses? Follow these steps to carve out some room in your budget for irregular bills and unforeseen costs.
First, it actually may help to identify your recurring expenses, as this will form a baseline of your regular monthly budget. Business owners typically pay for things like:
- Rent or lease payments
- Insurance premiums
- Loan or debt payments for business financing
- Software or technology subscriptions
- Payroll
- Tax payments
- Utility bills
Recurring expenses are the bills you pay that are more or less predictable. Granted, things like payroll and utility costs can vary from month to month, but you'll still budget for these operating expenses. Even annual expenses can be considered recurring expenses as long as they stay roughly the same year to year. Your monthly budget will therefore contain many of the above categories, allowing you to set aside enough money to cover these expected costs.
Now it's time to name some non-recurring expenses. These can be one-time expenses that you plan for in advance, but they can also be unexpected expenses that your business incurs due to an emergency or equipment failure.
Common examples of non-recurring expenses include:
- Legal fees
- Equipment maintenance or replacement
- Property purchases
- Restructuring costs
- Marketing for a new product launch
- Recruitment marketing to hire new team members
- Research and development for new products
A non-recurring expense is anything that doesn't directly contribute to your daily operations. For example, while you may have a set marketing budget, you may also incur an additional, one-off expense to pay for a new product launch campaign.
Knowing how to budget for non-recurring expenses will first require you to know how much they cost. Once you have a list of your non-monthly expenses, assign a dollar amount to each line item.
You may be able to find estimates for things like legal expenses by searching online or looking through industry publications. But you can estimate the cost of other items by looking at your financial statements. How much did you spend on each of these expense categories in the past year? Your previous expenses will be a good indicator of how much your future expenses will be.
If you want to carve out room in your overall budget for these expenses, simply add up all of your non-monthly expenses, then divide by 12. This will show you how much money you'll need each month to cover these non-recurring costs. And after the year is over, if you've saved more money than you needed, you can simply reinvest the excess back into your business or pad your emergency fund.
One of the best ways to manage irregular expenses is to plan ahead for them. This is known as using "sinking funds," where you take a one-time purchase and save for it bit by bit. For instance, suppose that you plan to upgrade your business equipment. You can budget for this cost by:
- Setting a date for your desired upgrade
- Estimating the cost of the upgrade
- Dividing the cost by the number of months between now and your upgrade
- Saving that much money on a monthly basis to reach your goal
Budgeting for these sorts of predictable one-time costs makes it easier to make plans and achieve your financial goals. Making detailed plans will ensure that you have the resources to cover these costs without depleting the cash flow you need to maintain your ordinary business operations. In a sense, you're converting your non-recurring expense into a recurring expense by incorporating it into your monthly budget.
Bonus tip: Consider setting your money aside into a high-yield savings account while you wait for your funds to accumulate. That way, you'll build interest on the money you are saving for your future project. A certificate of deposit account (CD) is another option, but it has terms and conditions that must be met. Withdrawing your money prior to the maturity date can result in penalties. Planning your expenses will help you time your savings and get the full benefit of these financial options.
Even if you don't have a specific goal in mind, you can still plan ahead for unexpected business expenses. Work to build some room in your budget that will allow you to cover unforeseen or one-time costs.
A smart way to do this is to build a financial "cushion." Each month, make sure to leave some money in your bank account to cover one-time costs. While the saving method above lets you plan for future projects, having this cushion in place will empower you to seize new business opportunities as they arise.
Keep this cushion directly in your checking account. That way, you'll have immediate access to this money when a need or opportunity arises. Aim to keep between $500 and $1,500, though the exact amount depends on your preferences and the size of your business. This extra cushion can also be useful in covering evolving business expenses due to rising inflation.
Many business leaders derail their budgets by dipping into their regular savings accounts to cover emergency costs. Avoid this scenario by planning ahead for emergencies — build an emergency fund. You can use the money in this fund to cover costs such as:
- Equipment repairs or replacement
- Legal fees
- Cybersecurity-related incidents
- Employee emergency costs (e.g., temporary staffing)
- Business interruption costs
Make your emergency savings fund a major priority. Personal financial advisors encourage consumers to keep enough money in an emergency account to cover three to six months' worth of costs. Business leaders might also consider keeping enough reserve cash to maintain operations for several months of business interruption.
While other budgeting methods can help you with one-time expenses that aid your business, your emergency fund can assist with damage control. Without an emergency fund in place, you'll only deplete your regular savings account — or worse: rack up additional credit card debt to pay for non-recurring costs.
By making this fund a priority, you'll protect your other checking/savings account and prevent yourself from taking on new debt to cover unexpected repairs or other bills.
There's no getting around it: budgeting for these sorts of non-recurring essential costs will require you to direct more money toward non-recurring expenses. If that sounds challenging, it may be time to make adjustments to your monthly spending.
Start by taking a look at your financial statements. Are there areas where your company can adjust its spending? Take steps to reduce overhead costs by:
- Refinancing your business loans
- Negotiating with your suppliers for better contract terms
- Canceling unnecessary subscriptions
- Implementing automation to reduce the demand for labor
- Outsourcing non-essential tasks
Make sure to check your bank and credit card statements regularly. This financial data can alert you to areas where you may be overspending. By cutting back on non-essential expenses, your non-recurring costs will fit neatly into your regular budget.
It’s also important to time your expenses carefully. Saving gradually for an annual or one-time expense will also prevent you from depleting your cash reserves all at once since you've set clear priorities as you've made progress toward your future goal.
As your business grows, so will your needs. For example, the more equipment you have, the greater your risk of breakdowns. And costs will likely be higher for larger organizations. Similarly, even software subscriptions will increase in price as you add more users. Business leaders should therefore plan for these rising costs and adjust their budget to reflect changing needs.
So take the time at the end of each year to look back at your budget and how well you've managed non-recurring and indirect costs. Were you able to maintain financial stability while covering these one-time events? If not, you may wish to repeat the above steps to ensure that you have the cash flow in the coming year to pay for these expenses without having to deplete your company's primary savings.
What do you do if you've overbudgeted? You may be looking at a surplus, which you can use to:
- Reinvest in new business equipment or a marketing plan
- Offer employees a bonus to attract and retain the best workers
- Add to your emergency fund
- Start saving for next year's non-recurring expenses
Now is also a good time to make adjustments to your budget. If you've been saving too much for unexpected costs, it may be a good time to strategically allocate more money to new product lines, equipment, or other regular business costs.
Automating your finances will streamline this process. With the right tools, you'll have real-time access to your financial data. This makes it easy for you to review expense reports to gain insight into where your money is flowing.
How much should you generally budget for non-recurring expenses?
What percentage of your budget should go to non-recurring costs? There's no absolute rule, though it may be wise to devote 5% to 10% of your total operating budget to unexpected and non-recurring needs.
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BILL Spend & Expense is an expense management tool that empowers businesses to take control of their finances. Armed with this software, you and your team can automate expense reports and categorize transactions in real time. You'll have complete visibility over your organization to help drive your decisions and optimize your core processes, all while saving time.
As BILL customer Stevens Trucking puts it, the biggest advantage of BILL Spend & Expense is an “instant access to budgets that fosters accountability.” BILL helps its customers “simplify everything in accounting,” giving you complete transparency over your 48 budget and finances, helping you save for non-recurring expenses confidently.
See for yourself by exploring BILL Spend & Expense today. Schedule a personalized demo to learn more.