Wednesday, August 18, 2010

How do I know if a budget expense is variable or fixed?

Here’s another question for you: why should you care? After all, many planners never have to worry about this at all. I’ll assume that, if you asked the question, you care about the answer. However, my take on it in general is: if you are going to work with event budgets, then it is your responsibility as a meeting planner to make those budgets as accurate as possible. Knowing whether an expense is a variable or fixed cost is crucial to that goal. It is also an absolute requirement if you are going to do projections and not simply post-event reports. And, one of the most important projections you can do is to calculate at what point your event “breaks-even” and starts making money. [For more info on calculating the break-even point, check out my previous post on that subject (Part 1/Part 2).]

In preparing or working with conference budgets, one area that many novice planners struggle with is knowing when a budget expense is fixed and when it is variable. Fortunately, there is a simple rule of thumb that will help you keep it straight: if the total cost for an expense goes up or down proportionally as you increase or decrease the number of participants, then it is a variable cost. If not, it is a fixed cost.

Some cases are easy – meals, for example. Food and beverage costs are nearly always considered Variable Costs when calculating event budgets. Why is that? Well, meals are prepared, served, and billed “per person”. If your 75 person meeting suddenly jumps to 125, then your total bill jumps proportionally; each person added to the count increases your costs by the same amount. Similarly, the total cost of your meal will drop if your numbers drop (providing you have not already guaranteed a minimum number of meals). Handouts for attendees and confirmation letters are two more examples of Variable Expenses.

Speaker fees are another simple example – this time of a fixed cost. If you are paying $1,000 to a speaker, that fee does not usually change if there is a change in the number of attendees for the meeting. Nor do the speaker’s travel costs change (if you are paying for those). It does not matter how many people actually attend your meeting, the airline will still charge the same for the speaker’s ticket. Other examples of Fixed Costs are meeting space rental, audio-visual charges, and marketing expenses, just to name a few.

So what about tax and service charges – the dreaded “plus-plus”? They count as Variable or Fixed, depending on what expense they are tied to. When calculating tax and service charge on meals, you should include them as a variable cost. If they are being tacked on to room rental, then they should be treated as fixed.

Though much of this may seem to be pretty obvious, it can get confusing. Where most people start making mistakes is when they see expenses that do change as attendance numbers change but are not directly tied to individuals. Audio-Visual charges, for example, can often trick novice planners – these fixed expenses are often misidentified as variable. What the planner says to me is something like: “but I would not have ordered that microphone if my numbers had not grown so it must be a variable expense.” While that statement may be true, adding or removing a microphone on your order is a result of a certain threshold being reached and not a function of each individual added to or subtracted from the audience – therefore it should be considered a fixed expense.

Though the examples provided here are but a few of the potential budget items that you might have to manage, the rule of thumb provided above should aid you in determining how each item in your budget should be handled. If there is an item you are not sure of, or have questions about specific budget items, please send me an email and I’ll be happy to respond to your questions.

~ Karl Baur, CMP • Project Director, RDL enterprises