The raison d’etre of every small business is to make profits. And most small business owners believe that the best way to do that is by increasing sales. But that brings up another conundrum – in order to increase sales, there has to be a corresponding increase in costs because of the increased amount of work involved. But increased costs are just what need to be curtailed. Therefore, another way of going about lowering costs is by controlling them, and thus increasing profit margins.
Fixed and Variable Cost Control
There are two types of costs in business – fixed costs and variable costs. Fixed costs are those that are not related to the amount of sales or production. They usually include rent, insurance, and the costs incurred by the utilities in use, or for running the business, such as salaries, advertising etc. Fixed costs can change over a period of time, although the increase or decrease is not connected to production. Variable costs, however, are directly related to business activity. Raw materials and inventory are perfect examples of the variable costs of a business enterprise. Inventory has to be kept on hand in the retail industry, and with increased sales, there has to be an increase in the inventory too. Likewise, with raw materials, the more goods you produce the more raw materials you will need.
So now, you must be wondering just how to lower those bills in order to control your business costs. Well, there isn’t one cut and dry answer, and you will need to examine your whole business strategy determine how to achieve cost-reduction without impacting your business adversely. Paradoxically, sometimes in order to save money you will need to spend money, such as upgrading the equipment in use.
Here are some effective cost-cutting strategies:
Scrutinize your products or services. Find out which of them are the most or the least cost-effective. Cut down on those that give you the least profits, while investing more on those products that are the most lucrative.
Make variable costs your target. Cut down on fluctuating costs like advertising and employee salaries first, before targeting fixed costs like the rent and utilities. This is because cutting back on fixed costs can cause more financial and operational pain than when variable costs are cut.
Question every aspect of your business. Look at every expense, and see how each one adds to the value of your business. Does it make any difference to the bottom line? Are there any other options? Are there better, faster, cheaper ways of doing things?
Monitor your costs constantly. Don’t cut costs just to shore up a faltering business and then forget all about it once short- term objectives are met. Always keep track of your finances and always find ways to cut costs.
The best way to effectively cut costs is to penny-pinch ruthlessly. When you begin a small business with little money, harsh circumstances teach you to be frugal with business expenses. But with growth, it is easy to lose track of expenses. You should always keep in mind that for your business to be successful, a thrifty mind-set is essential.