Essential and optional costs

Essential cost

Essential cost is the cost that is mandatory to conduct business. For example, if you are a chief doctor in a group practice setup then your annual professional registration fees become an essential cost. Without paying the professional registration fees you are not eligible to practice medicine. Hence this becomes an essential cost.

If you are a cab driver then your car insurance premium is an essential cost. If you are a plumber working as an independent contractor under your own business name then liability insurance premiums paid every month to covers all associated risks are the essential costs. There are very little or no room to avoid the essential costs.

Optional costs

Optional costs can be considered as non-essential costs. additional coverages. For example, if you are a chief doctor managing a group practice setup and you are offering to pay for other doctors’ annual professional registration fees then this becomes an optional cost. Usually practising doctor pays his or her professional registration fees themself. If you are offering to pay their professional registration fees then you are giving them an employment perk which is usually considered as an optional cost.

Let us say you are a cab driver and you have accidental coverage as well as car rental insurance as a part of your insurance policy. If you are eligible to cover car rental insurance elsewhere then the car rental insurance can be considered as an optional cost. Some credit card companies offer free car rental insurance if you book car rentals using their credit card. In such cases, if you have such a credit card then you need not buy rental insurance from your car insurance. Here accidental coverage in your insurance policy is the essential cost and the car rental insurance coverage in your insurance policy is the optional cost.

This is the cost that can be cut to improve profitability. When you are in the cost-cutting mode you identify all optional costs and eliminate it. A perfect example is during the recession most IT companies got rid of their free coffee vending machines. The cost involved in the maintenance of a free coffee machine is considered as an optional cost.

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