7 Simple Ways for Businesses to Reduce Variable Costs

Cost of goods sold, repairs and maintenance, taxes, travel expenses, and office supplies are just a few examples of the many types of variable business costs. Spending on variable costs is volatile and unpredictable in nature, making it difficult to manage.

That said, effective control and management of variable costs can help increase your profit margin. Read on for practical tips to help you reduce variable costs in your business.

1. Scrutinize Your Products & Services Regularly

The number of products or services you sell is directly related to variable costs. As you produce or sell more products, variable costs increase. Scrutinizing your products and services will allow you to find cost-saving opportunities. You should also look at all other aspects of business operations to identify functions contributing to variable costs.

Analyze the profitability of your products and services so you can focus on the most profitable and eliminate the least. Maybe one of your products could be designed with fewer parts or features. On top of that, inefficient internal processes like production design can also add to variable costs.

2. Negotiate Better Terms With Your Suppliers

Negotiating better terms with your suppliers can help lower the cost of goods sold or manufactured for your business. Many suppliers will offer discounts for buying in bulk. Identify products that might allow you to negotiate for volume or early payment discounts. Start with the product that will provide the most significant cost savings.

Consider asking your utility providers for “budget billing,” where you pay the same amount each month to reduce the variability of your utility expenses. Look for ways to reduce distribution costs from your suppliers and to your customers, like packaging improvements and alternative distribution channels.

3. Manage Wage & Salary Costs

Salaries and wages are typically among the biggest expenses for any business and can vary from month to month. Labor costs fluctuate with the seasons, sales volume, and other factors. Effectively managing these costs can reduce variability over time, lower total labor costs, and increase efficiency.

Consider investing in training to help your employees become more efficient, so they can complete more work in less time and reduce overtime. Find ways to streamline your processes to boost productivity, like implementing automation. Outsourcing some positions to contractors can also lower your overall labor costs.

4. Continually Monitor Your Variable Expense Average

Averaging your variable costs can reveal patterns over time. You might notice that you pay roughly the same amount each year, with seasonal fluctuations occurring around the same time. Monitoring these averages will allow you to budget more effectively and prepare for months with higher expenses.

Calculate your average expenses for the last several years or, at the very least, the previous 12-month period. Use the highest average from the last few years to estimate the next year. Then compare the highest bill to the average, and make sure you have enough of a buffer to cover the difference.

5. Reconsider Your Budgeting Strategy

Reworking your budgeting process can help you prepare for the unknown. Incorporating new strategies can make your business more agile in response to volatility in variable expenses.

Use variable expense averages to build your budget. Establish a dedicated savings account to serve as a cushion for unexpected expenses. Securing a business line of credit can give you access to emergency funds as an extra layer of protection.

6. Invest in Advanced Business Technology

Advanced technology like automatic light switches, HR software, or an ERP system can lower your variable costs with minimal effort. These systems use AI, OCR, machine learning, and other tools to optimize your business processes and operations. Software can also analyze spending data and provide valuable insights.

Look for technology that optimizes your most volatile expenses, such as labor. For example, workforce management software anticipates your sales and schedules employees accordingly. Expense management software can track your spending, set limits on variable expenditures, and help you find opportunities for savings.

7. Use Virtual Payment Cards

Virtual payment cards are the most effective way to control variable costs. By using virtual cards, you can ensure that spending doesn’t go over budget.

A virtual payment card should allow you to set spending limits by category, card, vendor, and more. The best virtual cards also provide insights through a spend management dashboard. Keep in mind that you shouldn’t have to pay any transaction fees to use these cards.

Reducing Variable Costs Is Essential

Most business failures have to do with cash flow issues, and mismanaging variable costs can put your company at high risk. Controlling and actively seeking out opportunities to reduce variable costs is essential to ensure profitability, continuity, and long-term success.

FAQs

What are variable business costs?

Variable business costs are expenses that fluctuate based on the level of production or sales. Examples include cost of goods sold, repairs and maintenance, taxes, travel expenses, and office supplies.

How can I reduce variable costs in my business?

You can reduce variable costs by scrutinizing your products and services for cost-saving opportunities, negotiating better terms with suppliers, managing wage and salary costs, monitoring variable expense averages, reworking your budgeting strategy, investing in advanced business technology, and using virtual payment cards for better control over spending.

How can scrutinizing products and services help reduce variable costs?

By analyzing the profitability of your products and services, you can focus on the most profitable ones and eliminate the least profitable ones. Additionally, identifying cost-saving opportunities in production design and internal processes can help reduce variable costs.

How can negotiating better terms with suppliers lower variable costs?

Negotiating volume or early payment discounts with suppliers can lower the cost of goods sold or manufactured for your business, leading to cost savings.

How can managing wage and salary costs help in reducing variability?

By investing in employee training, streamlining processes, and possibly outsourcing some positions, you can increase efficiency, reduce overtime, and lower total labor costs.

How can averaging variable costs help with budgeting?

Averaging variable costs over time can reveal patterns and fluctuations, allowing you to budget more effectively and prepare for months with higher expenses.

What is the importance of using virtual payment cards to control variable costs?

Virtual payment cards allow you to set spending limits by category, card, vendor, and more, providing better control over variable expenses and preventing overspending. Additionally, they offer insights through a spend management dashboard and help in tracking and optimizing spending.

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Mesh Content Team