Fixed expenses are business expenses that stay consistent over time. Costs like insurance, employee salaries and gas/electricity bills are just a few examples of this. Because of their constant presence, fixed expenses can be a major hindrance on a business’s profit margins when managed improperly. If you are a business owner concerned about a fixed expense problem, try employing some of these methods for reducing them below in addition to considering implementing a loss leader strategy.
Differences Between Fixed And Variable
The first step to reducing expenses is to understand the differences between fixed expenses and variable expenses. While fixed expenses are those that you cannot avoid, as mentioned above, variable expenses are incredibly flexible. A variable expense is any spending that is discretionary. Discretionary spending refers to expenses like buying coffee, eating out at a restaurant or getting a drink with your friends or colleagues. Fixed expenses refers to those that can be predicted and accounted for ahead of time. Keep reading if you want to find out how to lower costs associated with fixed expenses.
Manage Employee Salaries
Employee salaries are some of the biggest fixed expenses in any business. Thus, it would be wise to start here for cost reduction. Analyze your payroll carefully and examine the production you are getting from each employee. If the numbers show that their level of work can be produced by a less experienced, lower-paid employee, it might be time to consider a few personnel changes. Lay-offs are also an option for employees that are costing the company more than they are bringing in. While it is never a pleasant experience to have to get rid of people, it is difficult to ignore the enormous impact it can have on your fixed expenses.
Lower Insurance Premiums
Insurance premiums are especially painful due to their uncertain necessity. You may end up paying thousands of dollars for services you never utilize. Getting rid of them is usually not an option, however, which is why you should work on lowering your annual insurance costs instead. If you have not filed an insurance claim in a few years, you are likely eligible for a reduction in insurance costs due to your good history. Installing a sprinkler system to reduce the chances of fires may also have an effect on insurance costs. There are plenty of efficient ways to cut down on insurance premiums. There are also many ways to find cheaper car insurance for any business cars you may have. Utilize them and you will see an immediate effect on your fixed expenses.
Rent, Don’t Buy
Renting rather than buying your business location can save you a lot of money in the long run, unless, of course, you own a property management business. While long-term ownership contracts lock you in for extended periods of time, rental agreements free you up for renegotiation whenever your lease is up. Thus, you can always discuss a reduction in monthly payments based on your landlord’s willingness to keep you around. Or, you can always opt to look for a cheaper location. Rental costs are always going to weigh on your fixed expenses. Therefore, you should look to negotiate on them and keep your expenses low.
Analyze Your Advertisements
If you market your business through advertisements, it is important to analyze the impact they are having on your profit margins. If your sales have not increased since starting your advertisements, you may want to look towards cutting down on them or getting rid of them altogether. If you have fixed contracts with advertisement companies, you can also discuss your analysis with them and negotiate on lowering payments. You should not be wasting money on a fixed expense that is not benefiting you in some way, so be certain that your advertisements are being utilized efficiently. This will only help manage your fixed expenses.
If they are not managed correctly, fixed expenses, as the name would imply, are consistent costs that can slowly cripple your business over time. While it is unreasonable to think you can get rid of them, there are plenty of ways to reduce your overall costs. By utilizing the methods laid out in this post, you will be able to reduce your fixed expenses and maintain your business’s financial health.
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