Part Four - Personal Expenditure

Personal expenditure

Types of expenditure

Every business has to budget its expenditure. It has to estimate as accurately as it can what cash it will need to spend, on which items in what quantities and in what time periods. It also has to ensure, as far as possible, that its inward flow of cash from its customers, together with its cash stock, is going to be sufficient to meet all calls made upon it as they arise.

A private individual is in much the same position. He also has to budget his expenditure in such a way that his flow of income, plus his stock of cash, is going to be adequate to see him through.

Fixed and variable expenditure

To help in framing your budget it is useful to make a distinction between those items of current expenditure that are fixed, at least in the short to medium term, and those that are variable, that can within reason be lowered or raised according to how you plan your activities. Fixed expenditure is said to be 'time-based' in that it is proportional to time; variable expenditure is said to be 'activity-based' in that it can be expanded or contracted according to your decisions on what to do and what not to do.

In the case of a business, for instance, the fixed expenditure or costs will include rent and rates on premises, interest payable on borrowed capital, insurance of premises, machinery and stock, and the minimum costs of telephone, heating, lighting and power needed to keep the business in existence. None of these costs can be reduced without causing the business to collapse, or to contract significantly.

The remaining expenditure will vary more or less in direct proportion with the level of activity of the firm. In a time of expansion purchases of stock and materials will rise, stock carried will need to be higher, wages will increase as will cost of power consumed, telephone, administrative staff, postage, labelling, transport and so on.

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