Every small business wants to increase profits. Most small business owners believe that the best way to do that is by increasing sales. The reality is that you can increase your profit margin by reducing your variable cost. By taking a closer look at your business operations, you will identify ways to lower variable costs and boost your bottom line.
Here’s why this approach works: in order to increase sales, there is usually a corresponding increase in costs because of the increased amount of work involved. So, to increase profits quickly without increasing sales, reduce expenses – particularly your variable costs.
Fixed Cost and Variable Cost Definition
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 are directly related to business activity, such as raw materials and inventory. For example, in the retail industry, you have to keep inventory on hand. With increased sales, you will need to increase your inventory. Likewise, with raw materials, the more goods you produce the more raw materials you will need, which increases your variable cost.
You might be wondering just how to lower those bills in order to control your business costs. There is no single cut and dry answer. 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.
Ways to Reduce Variable Costs
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. Cutting back on your fixed cost can cause more financial and operational pain than cutting your variable cost.
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 variable cost constantly
Don’t cut costs just to shore up a faltering business and then stop monitoring it once you meet your short-term objectives. Always keep track of your finances and always find ways to cut costs.
Your Mindset to Increase Profits
The best way to effectively cut costs is to penny-pinch ruthlessly. When you start 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 to increase profits.