To create and maintain a company, there are a number of costs. You need to purchase supplies, pay taxes, pay your team, and more. To optimize cost management, you need to classify them as a company's fixed or variable costs.
By better understanding your costs, you'll know which ones are directly involved in your company's production process, which ones can be reduced, and how this will impact (positive or negative) your business. This way, you'll have a better chance of making informed decisions.
In the following topics, you'll understand the concept of a company's fixed and variable costs, the main ones, and how to reduce them. Enjoy your reading.
Many factors can affect a company's costs. Some are more frequent, take up a larger portion of the budget, are involved in the company's core business, and can even be considered strategic. Others, no.
To facilitate cost management, it's common to classify costs according to a few criteria. Costs can be distinguished: direct and indirect, strategic and non-strategic, fixed and variable. This article focuses on the latter set of costs.
To make it clearer, imagine you had an unusual month and your sales doubled. The staff had to work overtime, and the store was open longer. At the end of the month, the cost of electricity increased. The store consumed more energy, and the bill increased.
In this case, we have a variable cost. In short, it's the type of cost that varies according to the company's productivity and delivery levels. In other words, it's not stable over time.
Fixed costs, on the other hand, remain stable, even if the company becomes more productive. Renting a commercial space is an example of this. No matter how much you sell, at the end of the month, the rent will remain exactly the same.
Some costs can be misleading. For example, is sales team pay a fixed or variable cost? Well, you might say it's a variable cost because it changes according to sales volume, but that's not quite the case. You need to analyze it more deeply.
First, the term "pay" is very broad. It includes the monthly salary, which is fixed. It also includes the team's commission, which varies significantly depending on sales volume. Therefore, salary is a fixed cost, and commission is variable.
Below, we present some of the main fixed costs:
On the other hand, there are also variable costs, see:
A company's costs can vary greatly. So start by taking a general look at your monthly costs. Then, classify them according to their stability. This way, you'll know exactly what your fixed and variable costs are.
There are many potential cost-cutting strategies. To reduce a fixed cost, you need to invest in increasing productivity. This way, you can produce more while spending the same amount, committing a smaller portion of the company's budget.
Variable costs require different strategies. You need to renegotiate with suppliers, keep consumption low, and avoid waste. This way, you'll consume fewer resources and, consequently, reduce your monthly costs. Learn more below!
First, it's a good idea to renegotiate with suppliers. Assess the services currently provided to the company, such as landline phone packages, security services, and legal advice, and begin a "crusade" to reduce these costs.
You can also negotiate with suppliers of materials sold in your establishment. By obtaining a lower purchase price, you'll have more profit margin and will compromise your budget less. So start renegotiating.
Small wastes can add up to more costs for your company. For example, using more electricity and water than necessary will result in a higher bill at the end of the month. The same goes for the excessive consumption of paper, disposable cups, and other items.
In this case, it's a good idea to meet with the team and launch a slogan: zero waste. All company resources should be well utilized, without waste that generates extra bills. Everyone should understand the importance of this.
By increasing productivity, fixed costs will remain the same, and the company's profits will increase. In other words, relative to the total volume of profits, costs will become increasingly lower. This is called economies of scale.
To increase productivity, it is interesting set goals challenging tasks, train the team, reward high performance, and create a culture of delivery. The more the company produces, the relatively lower its fixed costs will be.
In the cost reduction process, it's important to monitor financial indicators frequently. This way, you'll know exactly which costs you're reducing and which are increasing over time.
Therefore, establish and monitor some reports regularly, such as monthly or quarterly. The income statement (IS) report is a good example. The cash flow report is also very important.
Finally, take the opportunity to thoroughly review your current taxes (duties, fees, and contributions to the government). Some companies pay more taxes than they should, which affects their financial performance and compromises their monthly budget.
In this case, the most interesting thing to do is meet with accounting professionals or external auditors and analyze recent taxes paid. Can they be eliminated or reduced? Are they being paid appropriately? These are two important questions.
So, now you're up to speed, you know what a company's fixed and variable costs are and how to identify them. Reducing these costs is a process. It's necessary to renegotiate with suppliers, avoid waste, increase productivity, monitor reports and assess whether taxes are being paid correctly.
Did you like our article? Take the opportunity to continue learning with us. Check out the mistakes that most hinder your sales and how to avoid them. Let's go?
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