As an entrepreneur, I notice a warm, tingling feeling every time I think about growing my small businesses. If you are a small business owner too, I’m sure you know what I’m talking about.
That nice feeling is put to the test when we have to face our financial plan. And within that plan, there is a non-negotiable red line: the fixed expenses we have to face every month.
For example, if you are thinking about setting up a restaurant, I recommend you read how much it costs to maintain it and a detailed breakdown of your expenses. You will get an idea of how hard it can be to control your costs and to try to reduce them.
In other words, fixed expenses are a critical factor in every business.
The type of expenses you have will determine the minimum net profit that your business has to generate to be sustainable. That is the break-even point of your small business. If we generate profits below that point, definitely something is not working.
What Are Considered Fixed Expenses?
The list of fixed expenses is extensive, but there are some that your small business has to face on a daily basis. You can’t escape from them even if you are Houdini!
- Unless you negotiate other terms with your landlord, you will have to pay rent every month.
- There are other fixed expenses (insurance policies, alarm…) associated with the rent: some of them are your landlord’s responsibility, and others are exclusively your responsibility. Carefully review the terms of the rent agreement.
- If you own your establishment, you will also have to deal with property taxes.
2. Equipment leasing. For many companies, it makes more sense to lease the equipment they need rather than buying it. The monthly payments towards equipment leasing are considered a fixed cost.
3. Technology expenses (Equipment, Software Licenses …)
- Although your equipment has an estimated useful life, keep in mind that accidents or breakdowns can happen.
- Every day there is new software in the market, forcing us to match or improve our current systems. Updates and maintenance have a cost. In addition, it may be necessary to receive training to learn how to use them.
4. Financial expenses. By this I simply mean the money it costs you to use money from a third-party.
- Mortgage costs: if you own the premises or office where your business is located, probably you are paying a mortgage (which will include interest and other fees).
- Business loan costs: the same applies if you are making monthly payments towards a business loan (to finance the purchase of your equipment, renovate your space, etc.)
- Fees for other types of loans: regardless of the type of financing you are using, it will involve a cost. Money is never free! Just keep in mind that some forms of financing, such as credit cards, carry variable expenses (your credit card monthly bill will depend on how much you used your card that month).
5. Expenses derived from expert advice (Taxes, Accounting and Financial Advice). It is a fixed but necessary expense. Expert advice is vital for your company to operate properly. On this point don’t skimp on costs!
6. Utilities. They may have a variable component (the more you consume, the more you’ll have to pay for utilities), but they are mainly considered fixed expenses. Check your utility bills to find out how much you’re paying for:
- Water and garbage or waste collection services
- Landline and mobile phone systems and internet
- Renewable energies
Besides property insurance, there are other types of insurances related to the daily activity of your business. Some of them are mandatory (and they can be expensive) and others are not, although assuming their cost will allow you to sleep tight at night:
- General liability: it covers the personal or material damages accidentally caused to third parties during the exercise of your business activity. Some common types:
- Employer (it covers your workers)
- Insurance for professionals and companies you subcontract
- Owner’s insurance (it covers damages in the premises you are renting)
- Product (it covers, for example, the food you serve in your restaurant)
- Thefts that may occur in your premises
- Water damage (it covers, for example, possible damages in your pipes)
- Workers’ compensation insurance (which may also cover disability or death). Depending on the type of activity of your business, it may be mandatory.
8. Local, state and federal taxes. Make sure your tax payments are up to date. Ask a professional tax preparer for help if needed. Not paying your taxes has serious legal and financial consequences.
9. Employees’ salaries. This does not include stipends or rewards, that may vary depending on the goals or other milestones your employees reach.
- When you buy an asset (for example, a piece of equipment or a patent), its price depreciates from the get-go.
- To reflect that loss of value in your accounting books, you must record the useful life of that asset. For example, a piece of machinery costing $10,000 and with a useful life of ten years, can involve a depreciation cost of $1,000 every year.
16 Tips to Reduce Your Business Fixed Expenses
1. Always question your financial decisions.
- Consider the percentage of your fixed expenses over your company’s general expenses.
- Ask yourself a key question: is there a way to reduce these expenses, without losing the quality of your product or service?
2. Keep an updated database of suppliers.
- You don’t need to spend much time on this: analyzing the cost, quality and service of your telephone (landline and mobile) and the internet is quite simple. There is a wide variety of providers and you can change to a different one quickly. Also, look closely at the extra services that you are paying for: maybe you needed them by the time you hired them, but not now.
- Spend a little more time reviewing your energy expenses (electricity, gas, renewable energy) because you will have to manage data in the short, medium and long term. For example, installing a solar panel can be expensive if you only consider the short term cost, but it will significantly reduce your long-term fixed costs.
3. Diversify your insurance providers or hire a single agent.
- In my case, I prefer to use a single insurance agent that works with different companies. I don’t have the time to research what the different insurance companies can offer. And time is money (yes, I always insist.) My specialized insurance agent is a professional with more than 25 years of experience working with different companies. He can analyze the cost, quality and type of service from different insurance providers. Remember that analyzing only the cost is a mistake.
- Businesses can face accidents or unpredictable events, and it is advisable to have policies that cover those unforeseen events.
- My agent has bargaining power with companies: he can get better prices, and if there is a problem, he takes care of everything.
- If you have a thorough knowledge of your insurance policies, you have a lot gained.
- If you don’t want to hire an agent, once a year you can negotiate with different insurance providers the cost, quality and type of service they can offer you. Remember, opting for the cheapest option is not always the wisest decision. Always look at the quality and type of service they provide.
4. Let your insurance agent know any improvement and update in your facilities. If, for example, you have installed an alarm system and new cameras, that will reduce the insurance premium you pay to cover theft.
5. Consider financing options outside traditional banking. You can find financing providers online whose monthly fixed payments are significantly lower than those of traditional lenders.
6. Do you really need that office space? Let me tell you about my own experience with rent.
My second company was an auditing firm. I used to pay $400 a month for a small and centrally-located office (this didn’t include electricity, telephone, internet, insurance…) After a year, I had only received five clients in the office. I calculated that for each client I had paid almost $1,000 of office rent. If I had rented an office by the hour, it would have been cheaper. Obviously, I didn’t renew the contract.
Since then, as a consultant, I have eliminated the expenses involved in renting an office. I can work in my client’s office or from my living room (and sometimes, in a cafeteria with good Wi-Fi and sea views!)
7. Bartering is always an option.
- Do you have a bakery? Does your financial advisor buy bread daily? Offer him a daily loaf of bread in exchange for some of his services. It’s a win-win situation.
- Are you a contractor? Does the business next door own a van? If you need a van only three or four times a month, they may agree on an exchange: you can do some renovations in their space, and you can use the van when you need it.
- Are you a web designer? Web designers are in high demand. You can design the websites of other businesses whose services you may need.
- For bartering to be fair, you must be specific about the value of the product or service you are going to exchange, and set deadlines for both parties if needed.
8. Think about the cost of depreciation of your vehicle.
- Choosing a diesel, gasoline, hybrid or electric vehicle is a complex decision.
- The US Department of Energy has a calculator to compare the depreciation cost of a hybrid car against a non-hybrid one.
- Electric vehicles are expensive for small businesses, but you can still consider buying one. In 2018, sales of electric vehicles in the US increased by 81%, and it is a thriving sector. You can benefit from the increasing wide offer to get good prices. And renting is always a possibility.
9. Be efficient with your time.
- Yes, I always say that time is money.
- There are many simple ways to better manage your time. It is worthwhile to study your daily processes and try to improve the time you dedicate to them.
10. Work in the cloud. You will reduce the monthly fixed costs involved in maintaining servers with your IT provider.
11. Optimize your advertising costs.
- Make a cost-benefit analysis of your advertising expenses. You should know the approximate impact on your sales.
- Although they may not be as professional as a traditional advertising campaign, your social media can have a positive impact on your business for less money.
12. Find ways to reduce your bank fees.
- There are bank fees that may go unnoticed. Monitor monthly charges in your accounts.
- Meet with your bank account manager and ask for a detailed explanation of the maintenance fees associated with your account. Once you have that information, you can compare it with what other banks can offer you.
- It is also important to track your business expenses.
13. Keep your financial plan up to date and improve it every day.
- Try to anticipate the impact of your fixed expenses on your business; it will allow you to reduce them and keep them under control.
- Project the effect that your fixed and variable expenses will have on your business cash flow.
- Find out the sales you need to meet to cover your fixed costs: be specific and get the exact number.
- There will be months when you have some extra cash and others when you are low on cash: keep an eye on cash flow fluctuations. A shortage of cash can affect the control you have over your fixed expenses.
14. Analyze the fixed amount of your employees’ salary on a case-by-case basis.
- Some of your employees may prefer to reduce their fixed salary in exchange for the possibility of receiving a stipend according to the objectives they meet.
- Here you can learn some techniques to reduce your labor costs.
15. Be as careful with your inventory as you are with the food you keep in your own fridge. You can learn here how to organize and manage your business inventory.
16. Always, always, always rely on an expert financial advisor. Count on us for that. Regardless of the complexity of your business costs, here at Camino Financial, we will show you how we are loyal to our motto: “No Business Left Behind”.
As you can see, without a financial plan in place or the advice of financial experts, reducing your fixed costs can be quite complex. Contact us and we will help you with your financial challenges!
I hope I have helped you think more efficiently and brought real value to your strategy. See you soon!
Keep reading How to reduce your business variable expenses.