There are two types of expenses, fixed and variable. Careful and regular monitoring should be in place for all businesses.
Fixed expenses remain relatively constant regardless of the volume of sales. These are usually salaries, insurance and rent.
If your organisation has a significant decrease in sales, profit is impacted as fixed costs remain constant. Additionally, although termed “fixed”, those costs can increase alongside changing economic and other trading conditions.
The following tips can help a business improve the management of fixed expenses.
- Regularly review all these costs and compare them against other suppliers’ pricing to ensure the business pays competitive rates.
- Salaries are classified as a fixed cost. You should review your staffing levels and make sure they align with your business activity
- Compare your expenses to the industry standard. This will also help you know if the costs you are incurring are in line.
On the other hand, variable costs are directly impacted by changes in the activity levels or the volume of products or services that your company produces.
It is crucial to differentiate variable costs from fixed costs as variable costs are critical when it comes to profitability. If your organisation is not performing as expected, sales can remain flat or are decreasing. It is essential to manage these costs in line with the sales to reduce the risk of profit erosion.
The following tips can help a business improve the management of variable costs.
- Analysing profit margins, not just on a company level but on all product lines. You may find that one product has a high margin and another a negative margin. This will not be evident unless you report on each product line.
- Make sure you are aware of which costs are attributed to sales. If you see that the profitability is reducing, you may need to reduce those not attributed to sales, for example marketing costs.
- Staffing can be a high cost for any organisation. Consider hiring staff on a casual or part-time basis so that you can scale your staffing levels up and down based on sales demand. There are also recruitment agencies that will handle this aspect for you.
Supplier / Supply Chain
When thinking of supply chain, you usually think about the delivery of goods, are they on time or are they correct, and when will you pay for them. If you think about your supply chain as another way to maximise your profitability, you will be on the right track.
The following tips can help a business improve the use of its supply chain:
- Implementing the proper inventory method, finding the balance between too much and insufficient material.
- Technology that suggests minimum material quantities, and when more stock needs to be ordered. As a result, this can reduce reliance on human interaction and ensure the stock is on hand when required.
- Review your supply chain arrangements regularly, look to see if you can get a better price or negotiate the current arrangement. Having your suppliers hold the stock could reduce your cost of storage.
- Always have two suppliers. If something were to happen to one supplier, this would not impact your organisation as much if you only had one supplier.
Each business has its own challenges when it comes to profitability. This blog only touches the surface around what can be achieved. The CFO Centre has been assisting SME’s for 20 years, offering highly experienced Chief Financial Officers on a flexible, part-time basis. As CFOs, we are qualified CPAs or CAs with extensive commercial experience across multiple sectors, so we know what to look for and how to respond.
Written by Elechia Jones, Regional Director, The CFO Centre
Photo by Adeolu Eletu on Unsplash
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