One day you're doing great and the next you're scraping for cash to make payroll. If you want to avoid these kinds of cash disasters, there are 3 things you can do:
- Charge more assuming you can add the additional value
- Sell more product or services assuming you have a profitable business model
- Reduce your costs
Today we will be talking about #3. We'll look at fixed and variable expenses, explain everything in a video and give you some tips to get started. If you want to charge more, check out our How to Charge More and Be Worth Every Penny blog post.
Video: Fixed and Variable Expenses
We talked about a lot of things in that video. Let's break them down into actionable steps to control the fixed and variable expenses in your business.
How to Control Costs in Business
For reference, here's the picture of the board we used in the video above.
Step #1: Define Your fixed and variable expenses
Before you get started, have your accountant or CFO services firm print off a list of all the transactions for the prior month; group them by vendor to be more efficient. Then write "fixed" or "variable" next to each vendor. How do you know? If you incur the cost in order to sell a product or generate a service, it's variable; examples would include materials and direct labor. If you incur the cost regardless of selling your products or services, then it's a fixed cost; examples would include rent, insurance, and administrative payroll.
Step #2: Set Budget Goals in Your Software
Now that you've labeled your costs, create a budget for them and make sure to enter that plan into your accounting software. As you incur actual costs throughout the month, you can track your performance against your plan. Too many business owners create a budget in Excel and leave it there. These kinds of budget plans never work out. Make your software do the work.
Step #3: Understand the Break-Even Benefits
In our example above, we assumed that the company started off with the following information:
In the video, we assumed that the company had a product that cost them $5 to make. Given that they have $50,000 in variable costs, that would mean that they sold 10,000 units.
Next, we assumed that we could improve our cost per unit from $5 to $4 and that we could lower our fixed costs from $25,000 to $20,000. If the company still continued to sell 10,000 units, their month would look like this:
Notice that by saving $1 on their cost per unit ($1 x 10,000 units reduces variable costs from $50,000 to $40,000) and by cutting $5,000 out of their fixed costs, we reduced their break even point by nearly $17,000 a month!
Isn't it amazing how small changes to the cost structure of your business can amplify your profits?
Get a Free CFO Services Call
I hope this blog post and video helped you get a better understanding of the costs in your business. If you're ready to take your profits to the next level, don't forget to book a free 30 minute session with one of our profit coaches and CFOs by clicking the orange button below.