When you hear the word “variable” attached to “expense,” most likely, uncertainty begins to take shape. Suddenly, your brain starts to spin: how can you keep those variable expenses under control, if they are volatile and unpredictable by nature?
Like you, I have to face my business variable expenses every day. And I want to communicate this message clearly: you cannot escape from your variable expenses, that’s true, but you can face them and find ways to reduce them.
Every penny counts. Every little money you can save will have an impact on your business growth. Therefore, you must learn how to reduce these variable expenses.
Let’s first understand what a variable expense is, and then I will give you some tips to reduce those that affect your small business. I will also provide you with some financing alternatives to consider.
Variable expenses can jeopardize the viability of your company. I know what I am talking about since I have lived it in the first person. There are unpredictable factors (such as Trump’s import tariffs) that cannot be anticipated, but having a solid financial plan in hand will minimize their impact on your business.
Business Expenses 101
There are in total of 4 types of business expenses:
This article will help you understand everything you need to know about variable expenses, and how to reduce them.
What are Examples of Variable Expenses?
The list of variable expenses can be endless. I will focus on those expenses that affect you the most as a small business owner. I’ll also divide them into their 2 main categories:
1. Operating costs
These are the variable costs that have to do with your day to day operations. These don’t usually affect the cost of your products or services.
Equipment repairs due to failures or accidents that are not included in your insurance policy.
Have you ever considered the fuel cost of your vehicles? It can affect your expenses considerably.
The same applies to delivery services: does that of your choice meet the quality standards of your company?
Specific Taxes or New Fees
Specific taxes (which vary throughout the life of your company) or new fees that did not exist when you created your business.
2. Cost of Goods Sold (or COGS)
These are the variable costs that directly affect the production of goods. They can impact the price of your products or services.
If these go up, you’d have to increase the price of your products. On the other hand, if costs go down, you can lower the price.
The discounts you offer to your customers by purchase volume.
👉🏽 The more they buy, the bigger the discount your customers receive. Therefore it’s not fixed but variable, depending on the quantity that customers buy.
👉🏽 There is a thin line between customer service and servility. You have to be able to distinguish both things. Your customer has purchasing power but you also have the power to serve their needs. I’m sure your customer, and you can happily meet somewhere in the middle.
👉🏽 Sometimes, because of our will to sell, we make mistakes like offering excessive discounts. It’s not my intention to lecture you since I’ve made that mistake in the past. And I can tell you that it’s not helpful and it won’t contribute to your business sustainability. Do not underestimate the value of your product or service just because you want to sell more. If your product or service is excellent, your customers will value it well regardless of the price. And if they only care about the price, maybe this type of client doesn’t interest you.
Raw Materials or Outsourced Services
The purchases of raw materials (i.e. the price of a bag of sugar a baker needs for his cakes) or outsourced services. For example, for some services, you can save money by hiring a contractor rather than by doing the job yourself. It will also save you time—which means saving money too.
What Are Variable Expenses?
Are you still unsure about the concept?
When your business sales grow (because you sell more products or because you gradually provide more services), your expenses also increase. That is what we mean by variable expenses (also called variable costs). They are the expenditures that change each month, they are never the same (unlike rent, for example, that is fixed, it never changes).
12 Tips to Reduce Your Business Variable Expenses
1. Find a Financial Product with a Fixed Interest Rate
It’s no secret that all businesses need external financing. If you decided to get capital with a credit card, line of credit, or MCA, you might have variable payments.
Consider switching to a loan that has fixed interest rates: this translates into monthly payments that never fluctuate. That way you won’t have nasty surprises when you receive your bill. You will also be able to plan your payments and keep tabs on the money going out.
2. Negotiate Discounts with your Providers
The same way that you offer discounts to your buyers, ask your providers for discounts by volume of purchase. It is important to know how to negotiate with your suppliers to reduce your variable expenses.
Negotiate with your suppliers and try to get discounts for buying in bulk.
3. Apply the Principles of Lean Management
I recommend you familiarize yourself with the concept of Lean Management. Get to know the philosophy behind the term and try to apply it to your business. Basically, it consists of a series of techniques aimed to reduce waste in your processes and better manage your time. Both areas involve a significant decrease in your variable expenses. You can apply the Lean Management philosophy being small. Don’t think it’s only for large companies. There is an abundance of free material on the Internet: start with something simple and it will change your mindset. I do my best to apply this philosophy to my daily operations, and I’m more efficient every day.
4. Improve Production and Sales Processes
Carefully study your processes of production and sales. Probably there are aspects where you could improve their efficiency. These tips to reduce production costs will help you.
5. Improve your Customer-Centered Areas
Take special care of those areas of your business where you add value to the customer, and study ways to reduce the cost of those areas that don’t offer any value to your customers. If you have products or services that leave only a small profit margin but require a lot of investment, you may even have to eliminate them to focus on more profitable ones.
6. Implement Business Technology
Try to implement business technology in those areas or processes where it makes sense. You will discover that investing in technology is one of the best decisions you can make: although it may seem like a considerable expense at first, technology will save you time and provide you with quality and efficiency. That means saving money too.
7. Use Social Media
Use social media efficiently. Your business must have a strong presence in social media, but you have to be efficient with your time. Social media are free and can help you reach a large number of customers, but they take time and dedication. And time is money (yes, I insist: time is one of your most valuable assets.)
8. Analyze Variable Expenses to Find Ways to Reduce Them
Include reducing variable expenses as a goal in your business plan. Study your business plan every week, analyzing alternatives and looking for ways to incorporate them.
- Regardless of the expense, it’s always better if it costs you a dollar and not two (but without sacrificing quality). However, this is easily forgotten when your sales grow. It has happened to me: when you increase your sales and profits, you don’t focus on saving, and that’s always a mistake.
- Monitor your expenses to ensure the sustainability of your business. Learn here more about how to track business expenses with five simple tips.
9. Outsource Labor
Outsource labor, if this allows you to gain efficiency. I insist: it’s vital that when you outsource, you don’t reduce your high standards of service and quality. You will have to explain them to your new employees and make sure they are met. Only that way you will be able to reduce your labor costs.
10. Reduce Costs and Expenses
Compare the cost of each area of your business with the value it adds to your products or services.
- Consider eliminating those areas with high expenses but with little impact on value.
- However, keep in mind this: there are areas with significant costs and little impact on value, but still, they have a high indirect impact on your business value (i.e. an employee in customer service does not necessarily increase your sales, but helps in something as important keeping your customers happy.)
Although electricity costs are often considered a fixed expense, some energy providers change rates if your production and energy needs increase. And that is a variable expense.
11. Change to Cost-Effective Fuel
Calculate the fuel option with a better impact on your business.
- My goal is to make you evaluate all your financial decisions, even if they seem small or irrelevant: have you considered the type of fuel your business vehicles are using? Would another type help you reduce your variable expenses?
- Have you considered the impact of an electric vehicle on your variable expenses?
- Finally, is it the best option to have a company vehicle? Would it be better for you to rent or even outsource the job you do with the vehicle?
12. Buy at Auctions and Second-Hand Markets
Stay tuned for online auctions. They will give you access to good opportunities that will reduce your variable expenses. The second-hand market is wide and may represent a great opportunity to get materials, equipment, etc. It’s something that I personally use quite a lot because it optimizes my variable expenses.
13. Update Databases
Maintain an updated database with the rates of your products and services suppliers. You never know when you may need to change providers due to an increase in their fees or a decrease in their activity.
Always communicate your team your business quality standards, even if they are contractors. It will save you costs and you’ll gain efficiency.
Improve Your Variable Expenses
Understanding what variable expenses are and knowing how to reduce them is critical to achieving the sustainability and growth of your business. And remember: don’t neglect your variable expenses once your sales grow.
Let me finish with an insightful piece of advice: now that you have an idea of the complexity of variable expenses and the possible need for financing to try to reduce them, I invite you to subscribe to our newsletter. In Camino Financial, we are loyal to our motto “No Business Left Behind”. You can count on our knowledge and experience to help you grow your business.
I look forward to continuing to add value to your business from my entrepreneurial and consulting experience!