It’s not always the case that a company’s outgoing cash flow will be comprised of fixed costs, or those that remain constant on a monthly basis. Regularly appearing variable expenses, such as high energy expenditures in the summer or shifting raw material prices, might imperil unprepared enterprises.
In this article, we’ll discuss strategies for regulating and lowering variable expenses that may help organizations weather the inevitable storms that inevitably arise.
We’ll analyze a range of methods, including payment options, for keeping track of and lowering variable costs. Come along as we investigate methods through which companies may better control their variable expenses.
The Foundations of Business Variable Costs
It’s common for organisations to have what are called “variable costs,” or charges that fluctuate on a regular basis. Think about any company that sells physical products. On June 2, 2022, AAA reported that the national average price of a gallon of gasoline was $4.72, with prices exceeding $6 in certain regions.
Although this is a significant increase compared to previous years, such swings in price are rather typical for gasoline. Prices are dynamic and tend to shift often. The additional expense that is incurred at the pump due to higher than usual fuel prices might be passed on to consumers by businesses. This is only one factor among several that might change the overall price tag. So don’t overestimate your variable costs.
Variable expenses often include things like:
- Material in its most basic form
- Electricity, gas, and other utility services
Products for the workplace
Costs spent by a business, such as hosting a dinner for a customer, might have a positive effect on sales in the long run, but may have a negative effect on profits in the near term
Greater sales volumes may coincide with higher production costs.
Costs of Operations
The cost of goods sold (COGS) is not as constant as it may appear and may change with the other variables we’ve discussed.
The price of IT outsourcing if demand suddenly increases
Non-fixed interest rates apply to loans.
Professional service fees, such as those charged by lawyers for ongoing representation
Temporary workers’ wages or the price of hiring more direct workers rise during peak production periods.
Insurance costs, especially after a claim has been made
PPC advertising on the web, whose prices might skyrocket during peak traffic times or owing to click fraud.
Although not a direct cost, companies may feel the effects of inflation if the rate of inflation is higher than the historical average of 3.2% and is now at 8%.
Semi-variable costs are those that still go up and down, but at more regular periods. While we won’t be able to regard them as such for short periods of time, they get close if we look at the big picture.
Having stated that, let’s take a look at some other foundational concepts related to variable costs for organisations.
The Importance of Controlling Variable Expenses
A new company faces several challenges just by opening its doors. Based on data collected by the US Bureau of Labor Statistics, over half of all private sector enterprises that launched in March 1994 failed within the first five years, another 66% failed during the first ten years, and just 15% survived until March 2022.