Managing Cost: The Secret to Starting a New Business
When you’re starting a new business, money can be difficult to manage. If you have a little seed capital, it can be easy to overspend on things that you think you need, when you haven’t explored any opportunities for cost savings. It’s rare to enter a market where you don’t have any competitors. When you are competing, you can be sure that there are companies who have had the time to optimize their expenses. If you want to remain competitive, it’s essential that you manage every penny that you spend. You can save money in unexpected places, and here are a few easy ways to break down your costs.
Fixed Costs
Fixed costs are periodical expenses that do not directly grow with your output. Examples of fixed costs would be your monthly rent, the internet, cell phone bills, and similar expenses. These are the foundation of your bills. If you have a busy month, these costs will be comparatively low when compared to your income. But if you have a slow month, then these costs can seem astronomical in comparison.
When you’re first starting out, it’s important to make reasonable projections. You might rent a large building expecting to be very busy, and find that you’re stuck paying rent that you didn’t really need to serve a smaller customer base. You can break this down further to identify some surprising ways to save money. Have you negotiated with your energy supplier to get the best rate? Can you start with small cell phone or internet plan, increasing it as you need? Cutting corners now can save you a lot of money in the future, and you’ll be able to scale up more easily than if you were trying to move into a new office.
Variable Costs
These types of expenses can be tied directly to specific products. For example, let’s say that you are producing hand-made goods. All of the material that you need to make each product would be a variable expense. If you’re going to overspend anywhere, this is the palace to do it. While your volumes are low at the start, you might be paying a much higher price-per-unit than you would if you were fully scaled up. At first, you might think that this is something you’d want to avoid. But this way, you can tie all of your direct expenses to sales. This offsets your costs, keeping money coming into your company just as fast as it’s going out.
How to Divide Costs
The secret to managing costs isn’t about avoiding your bills, it’s about assigning costs in a way that keeps them revenue positive. The first thing you should do is look at what expenses are mandatory. What can you not go without? See if there are any ways for you to migrate these costs into a variable system. For example, you could consider giving employees a commission based pay. Even if they make a little more per unit, you’re saving yourself from being put in a position where you can’t afford to pay an hourly wage on account of poor sales. The Fixed and Variable system is used by both small businesses and multinational corporations alike and is an excellent way to keep yourself competitive in a tough market.
