Postponable costs are expenses that a company can delay without significantly impacting its operations, production, or profitability in the short term. In other words, these costs can be put off until a future period without immediately harming the business.
Such costs might include expenditures for maintenance, repairs, marketing, research and development, or capital investments like new machinery or property. Depending on the company’s financial situation and strategic goals, these costs can sometimes be postponed to manage cash flow, reduce financial pressure, or allocate resources to more immediate needs.
However, while these costs may be postponable in the short term, they often cannot be deferred indefinitely. Delaying certain expenses for too long could lead to decreased efficiency, lower product quality, or reduced competitiveness, potentially harming the company’s performance and profitability in the long term. Therefore, it’s crucial for businesses to carefully consider the potential impacts before deciding to postpone these costs.
Example of a Postponable Cost
Let’s take a manufacturing company as an example.
This company has several different types of expenses: direct materials and labor (which are essential for production), administrative costs, maintenance of machinery, research and development for new products, and advertising.
Now, imagine the company experiences a downturn in sales, possibly due to economic conditions or increased competition. To manage its cash flow and remain profitable during this challenging period, the company might need to reduce its expenses.
The costs of direct materials and labor cannot easily be postponed without affecting the company’s ability to produce its products. However, other costs might be postponable. For example:
- Maintenance: If the company has been regularly maintaining its machinery and it is currently in good condition, the company could potentially postpone some maintenance activities for a short period. However, if delayed for too long, the risk of machine breakdown and expensive repairs increases.
- Research and Development: The company could decide to delay the development of new products. This would save money in the short term, but if prolonged, it could put the company at a competitive disadvantage.
- Advertising: The company might also reduce its advertising budget temporarily. However, this could lead to a decrease in market presence and potentially lower sales in the future.
Remember, postponing these costs is a short-term strategy and might have long-term implications. Decisions to postpone costs should be made carefully, considering both the short-term financial relief and potential long-term consequences.