Small business owners believe that in order to increase profit, they must increase their sales as well. However, what they didn’t know that the best alternative to do so is to cut variable cost. There are plenty of ways that you can cut variable cost as long as you observe and take a closer look at your business operations.
But how does this work? When we think of it, every time a business’ sales increases, the number of cost of operations increases as well. But by cutting variable costs, you can quickly increase profits without the need of increasing your sales. But before we get into it, let’s have a look what’s the difference between fixed cost and variable cost.
Fixed cost – It is the cost that is needed for the utilities of the company such as rent, insurance, and other costs that are used for running the business. This also includes the salary to be paid for the employees as well as the advertising for the products.
Variable cost – On the other hand, variable cost is the cost that’s directly related to the business like raw materials and inventory. The more your sales will increase, the more you should increase your inventory. This also applies to your raw materials as well because the more products produced, the more raw materials are needed thus, increasing the variable cost.
Now that we know the difference between the two, we can see that variable cost can really take a toll on your business’ expenses. So what are the ways to effectively reduce variable cost?
Scrutinizing Your Products/Services
First, we must scan each one of the products and see which of them is the least cost-effective and cut down that are unnecessary. Invest more on products that are ranking higher and sells more than the other compared to those who don’t.
Variable Cost Should Be Your Goal
Fluctuating costs such as advertising and salary shall be cut down first before focusing on fixed costs such as rent and the utilities used for your company. With that said, it’s easier to cut down variable cost compared to fixed cost.
Examine Every Aspect of Your Business
Check every expense that is used in your business and see which one is more effective and the ones that aren’t. Look for alternative options of bringing the products in a much faster and cheaper way to reduce variable cost.
Constantly Monitor Your Variable Cost
Always keep an eye on every cost you cut in your business. Your finances should be monitored constantly and seek effective ways to cut costs even though you already met your business’ short-term objectives.
Have a Positive & Determined Mindset
Whenever you start a small business with little money on hand, always think of ways how you can fully utilize this money in a wise move. Losing track of expenses is inevitable, but one should keep in mind that you should have a thrifty mindset to increase your business’ profits effectively.