What's the best way to budget for fluctuating expenses?

Use an irregular expense account. Separate this money from normal operations money. Take a hard look at a year of expenses. Pull out every expense that does not occur monthly and start making a list to total soon. You will find quarterly, semi-annual and annual expenses by doing so. 

Add in a budget amount estimated for the year for maintenance and repairs too. 

Do you need to update decor every five years? Split that amount up into yearly requirements. 

Need to replace equipment in three years and don't want to finance it all? Split that into one year increments to meet your target purchase date.

At the end you should have a fairly good idea of a required total annually. For ease of illustration, let's say your total is $12,000. You may need to jump start the account to get the cycle going with 2-3 months allocations. You would set aside $1,000 every month into this account. If weekly is easier, then you would set aside $250 a week Fridays of each month with the assumption you may be closed for holidays. Money is only withdrawn to put into normal operating account if it is on the list.

If the account never has enough money in it, you under estimated costs. If it continues to grow, then it is likely you have not paid for something on the list yet and it is accruing to do so.

This can help you level out expenses and cash flow when it would appear cash on hand is high, when in fact it is not because of those irregular expenses that are not yet due.

Another side benefit is the ability to limit reliance on credit for upcoming purchases. 

What if the budget is impossible upon review? That is a different issue!

Could you be under pricing goods?

Are you over staffed?

Are you in too large of a facility to support sales levels?

Is the business no longer viable in the current configuration and operational changes need made?

Etc. A deeper dive into the business operations may be required.

After all it is only money...YOURS!

I would recommend tracking these expenses over the past several years. Run an estimate of these fluctuating expenses.  You can set aside a sinking fund. You can set up a monthly expense category and deposit money into the account monthly. This will allow you to build up cash to pay these expenses when the come up. 

Don't we love our budgets! One approach is to divide the budget into two or three areas of interest.  One section would be the known items which seem to repeat each cycle with more predicable cost, the second area is the seasonal items which appear more variable however we would look at history on these items an classify them into a monthly or quarterly calendar system so they would be more predicable for the period in each season.  The third area are the items which come up which are not seasonal and predicable as one off items.  We can calculate the first two areas with our history of monthly or quarterly cost, the third area needs to have a funding for special considerations of maybe 10% of the total budget projected cost. All my best to your budgeting task. 

If you don't have the cash to weather the tough months than you shouldn't be in business.

Assuming that you have several years of past expenses it should be relatively easy for you to seasonalize an expense budget. In addition to your P&L and Balance Sheet you should also develop a Cash Flow schedule so that on a monthly basis you can see: Opening Cash + Collections - Expenses = Closing Cash, which will be Opening Cash for the next month. This way you should be able to establish a line of credit with your bank to cover any month(s) where you expenses exceed the cash that you have available.

My recommendation is to use all below comments but most biz owners do not have time to analyze the numbers. So my simple advice is to focus at several major expenses, including wage and large expenses, and control the spending for 6 months. The owner-managers shall check every month the expenses to see the improvement. Godo luck.  

Create a “contingency fund” savings account for your business. It should be in a high interest savings at your bank or somewhere with easy access. (In Canada) we use a Manulife bank Advantage account or WealthSimple Smart Savings (these have no fees and higher interest than most banks). The goal should be to build the account to hold at least 3 months of your average expenses. I know...easier said than done. For 2020, calculate your average monthly expenses and transfer any unused expenses to the contingency account until needed. Hope that helps.

You've gotten some useful responses. It all begins with knowing your numbers and creating a simple system to track. It doesn't need to be complicated.  It's a common challenge. Speak with your CPA to help create a simple system that will aide you in planning for the normal ups and downs of business. Good luck!! 

I would suggest that you budget for the seasonal fluctuations.  that is, if you have three to five years of history, you can do a spread sheet by month of your average monthly expenses.  you could also do a median, and/or a range per month.

Likewise, you could plot out your income on a monthly basis.  With a line of credit from a bank you could borrow to cover months when you will be short on income.

The result would be the creation of a "Cash Flow Analysis".    If you cannot do this your accountant can do it for you.

Russ McKinnon, Sr. Consultant, ERA -- 

I don’t know how long you’ve been in business, however, traditionally one would look at several trends, including industry, specific demographics to your business and projected sales and adapt your budget to better meet your seasonal fluctuations.   Hope this helps.