Lowering Risks: Getting a Grasp of Your Variable Costs

One of the biggest concerns is how to keep costs low and manageable when it comes to small businesses. For many business owners, variable costs can be a major source of risk and uncertainty. In order to help manage these costs and minimize risk, it’s important to have a firm understanding of what they are and how they impact your business.

First of All, What Is the Difference between Fixed Costs and Variable Costs?

Fixed costs are expenses that stay the same from month to month. Examples of fixed costs include office rent, annual salaries, and insurance costs. These types of expenses are easy to budget for because you know exactly how much they will cost each month.

Variable costs are those that can fluctuate and are difficult to predict. This can be contrasted with fixed costs, which are more constant and easier to plan for. An unexpected increase in variable costs can be a problem for a business, as it can throw off budgeting and planning.

Tips to Help You Mitigate the Impact of Variable Costs

1. Make the Most of Every Opportunity to Fix Costs at Lower Rates

You may be able to secure a lower overall price for materials and services by agreeing to purchase them at a fixed rate for a set period of time. This can help insulate your business from sudden price hikes and make budgeting and forecasting easier.

The thing is, even though you may have to pay a little more, it is worth it to be able to plan your budget and have peace of mind. This is especially true during the pandemic when a lot of businesses have had to renegotiate their rent.

2. Try to Be More Efficient

If your HVAC system is old, inefficient, and costing you money in gas prices, consider having it improved or replaced. You may be able to find other forms of transportation that are more cost-effective or use virtual services to complete business tasks that don’t require physical travel.

3. Study Your Past Variable Costs

Your business’s average cost variability is the range of prices that you typically pay for goods and services. To find your average cost variability, look at your business’s spending over the last few years. If your business’s spending has not fluctuate much, you can use the highest three- or five-year period for budgeting purposes. Your accounting department or bookkeeper can provide you with this information.

4. Create a Budget for the Highest Expected Costs

It’s never fun to have to budget for unexpected costs, but it’s always better to be prepared. Try to add an extra 3-5% to your budget for variable costs, just in case something comes up.

5. Establish a Savings Account for Your Variable Costs

Save now if you can; if not, start setting aside money little by little until you have enough to cover emergency costs. This doesn’t have to be a huge, ongoing contribution – just put away enough cash so that you’re prepared for any unexpected expenses that might come up.

6. Acquire a Credit Line before the Need Arises

The best time to get a loan is when you don’t need it. This way, you can shop around for the best rate and don’t have to worry about scrambling to find a loan in an emergency.

Conclusion

Overall, lowering risks and getting a grasp of your variable costs are important considerations for any business owner or manager. By understanding and managing these costs, you can improve your bottom line and protect your business from potentially devastating financial losses in the long run.

If you are looking for reliable accountants in Framingham, MA, look no further than our experts here at Ash CPA. We deal with individual and business tax returns, audit review and compilation, bookkeeping, non-profit CPA, and tax issues. Call us today, and let us help you with your variable costs.