How to Cut Down Company Expenses and the Problem of Fixed Costs

The main aim of every business, whether small, medium, or large, is to make a profit. To fulfil this purpose, businesses find innovative ways to increase their sales and cut down expenses.

Expenses can be divided into two categories- fixed expenses and variable expenses. Fixed expenses are long-term commitments and do not fluctuate with changes in the level of production or volume of sales. Insurance, rent, subscription, payment of loans, dues, etc. are included in fixed expenses. Variable expenses are directly proportional to the revenue or the activity level of the business. Variable expenses include raw materials, inventory, hourly production wages, shipping costs, etc.

 How Fixed Expenses Can Affect the Business

As mentioned earlier, fixed expenses are long-term commitments. Inadequate management of fixed expenses can put you in trouble because no matter how much your company is earning in a month, you must meet the fixed financial costs to continue operating.

For small businesses or start-ups, these fixed expenses can lead to negative consequences because of their effect on cash flow.  Cash flow problems occur due to:-

• Financial incompetency
• Lack of proper planning
• No experience in record keeping
• Hurried expansion

According to David Parrish, a writer, business coach and entrepreneur mentor, “As a business grows and its turnover increases, there is always a temptation to increase fixed costs. Then these higher fixed costs commit the business to regular cash outflows, even though the cash inflow may be more erratic, due to fluctuations in trade and delayed payments from clients.”

He further advises businesses not to increase their fixed costs if the future cash inflows are not guaranteed to be stable.

 Strategies to cut down expenses

1. Monitor your expenses

Keep an eye on the expenses of your business and calculate how much value it’s adding. If the expenses are not justified, then make it a priority to consider the matter. Find better options and cheaper methods to get the work done.

2. Plan Ahead

Planning in advance will help you have a better understanding of your business. A proper plan will not only help you overcome financial misspending, but will also assist in monitoring the costs.

3. Outsource Services

Hiring and managing new professionals can be expensive. To lower the expense of recruitment and management, outsource some of the work to a third-party that can complete these tasks in more cost-effective manner.

4. Negotiate Credit Card Interest Rates

Generally, small businesses use credit cards for travel expenses, working capital or minor purchases. These expenses can cost a lot due to high rate of interest charged by credit card companies. Reduce the cost by negotiating a lower interest rate and save a significant amount of money in the long run.

5. Negotiate with Your Suppliers

Getting a better deal at an affordable price will can only benefit your business. Negotiate lower prices with your suppliers to get the products at a reasonable cost. Look for other suppliers in the market and find the ones that offer the best prices for their items. Ask your partner to match the quote, if they disagree, then it may be time for a switch.

Expenses are an essential part of a business and managing properly them can solve many problems. It is important to keep track of the expenses and look for cost-effective options to run a successful business.