Operating expenses: How to Reduce Fixed Costs and Variable Costs Not Directly Involved in the Manufacture of Your Product or Service 

Exuberant operating expenses can put a substantial amount of strain and stress on a business’ bottom line. Finding ways to reduce fixed and variables costs can help to alleviate overhead and keep more money in the bank. Extra money in the bank means more money to put towards profiting. There are several options that can be explored in the journey to lessen costs. However, before making any drastic moves or cuts, it is important to know where money is currently being allocated.

By doing a little research and diving into a company’s income statement, one can identify the fixed and variable costs. Starting with fixed costs, go line by line and see where reductions can be made that do not sacrifice the quality of products or service. Then, move on to variable costs and make reasonable adjustments. Remember to focus on indirect costs. Though fixed and variable costs can vary between industries and from company to company, there are a few common costs that many businesses encounter.

A good place to start is the electricity bill. This can be as simple as being conscientious of energy being used on a daily basis. Brook Stahley of SunPower Corporation says that depending on the size of an organization, thousands of dollars can be saved each month by increasing energy efficiency. Stahley recommends the following:

  • Ordering an energy audit to see where you are using the most energy.
  • Turning off lights when they are not being used. Utilizing natural sunlight and installing long-lasting energy efficient bulbs. The United States Department of Energy recommends ENERGY STAR certified bulbs to save the most money and energy.
  • Installing motion detectors and automatic dimmers and using programmable thermostats to schedule heating and cooling that makes the most sense for the business but keeps things comfortable can also help. Keeping the office just one degree cooler during the winter and one degree warmer during the summer can reduce power usage by 10%.
  • Replace clunky, out-dated office equipment with newer energy efficient equipment. Be sure to understand the costs associated with new equipment and balance this against the savings.
  • Consider alternative and renewable energy sources. Keep energy-using equipment such as HVAC systems in good running condition. Something as simple as keeping vents clean can help avoid extra energy costs.

While we are on the subject of utilities, when looking at your water and sewage costs, be sure that you are aware of any leaky pipes or fixtures that could be using more water than intended. The Massachusetts Water Resources Authority demonstrates that replacing older toilets with low-flush toilets can cut the water quantities expended by anywhere from around 50% to nearly 80% per flush. For an organization with several toilets, this could mean tons of savings in the water usage department. Automatic sinks could also be an avenue to explore.

Speaking of savings in the bathroom, energy-efficient hand dryers can save money on paper towels in the restroom. Again, understanding where your usage sits, the costs of replacing existing fixtures, and the savings, in the long run, will help make these decisions. Cindy Quarters of Chron.com does address the fact that the initial cost of a hand dryer can be more expensive than buying paper towels, but the savings eventually surpass the cost of the equipment.

When looking at internet and phone costs, look to see if there are competitors that can offer the same or sometimes even better service for lower costs. Occasionally you can even negotiate with your current company to get a lower bill. Finding plans that combine the two services can also potentially save money. Be sure to take advantage of business plans as much as possible when they contribute to additional savings. Very small companies may be able to toss a traditional phone line and set up a free Google Voice line that forwards phone calls to existing lines.

Do not be afraid to look at your marketing budget and see where money can be saved that will not affect your sales. This is a delicate cost to adjust because marketing or advertising typically influence sales. Sitting down with your marketing team for a budget meeting to understand what works and what does not can make the decision much easier when figuring out what to cut. This may be a good time to meet with other departments, that do not directly work on the manufacturing of your product or service, to discuss their budgets as well.

Though negotiating insurance or rent payments may be difficult, it is certainly worth a shot to discuss with responsible parties. Researching more affordable insurance plans could allow for the discovery of lower premiums for the same coverage. Also, if moving to a more affordable location saves significant money, it is worth considering.

Reducing indirect fixed payroll costs in positions that do not directly involve your product or service is also an option, especially if there are areas of the business that can be automated, streamlined, or outsourced to save money. This requires more than a look at the income statement. An in-depth look at overall labor costs and operations would be necessary to make these decisions. However, for most companies, there are likely few to zero of these types of employees that are expendable.

Variable cost reduction could be a little bit trickier. The simplest way to reduce variable costs would be to decrease sales, however, that would not be very beneficial to revenue.

One area to look at is shipping materials or packaging costs. Shopping for more affordable shipping material could say several pennies or several dollars. Jane Porter, guest writer at Entrepreneur.com, suggests using packaging provided by carriers.

Credit card processing fees are a common variable cost for many businesses. Offering incentives for cash-paying customers can help lessen costs and may even increase customer satisfaction.

You can also examine what is being spent on office supplies and employee perks. Cutting waste or items such as printer paper and rubber bands or finding more affordable office supplies can help to save money. You can also consider offering incentives to employees who help reduce costs.

Indirect variable labor costs should be evaluated to see where there is waste. Paying two people for the job of one can really add up, and quickly. Unfortunately, sometimes positions need to be eliminated or hours need to be cut. One way to balance labor costs when sales fluctuate, for example, increased sales during holiday seasons, is to look at sales trends and determine if you need to hire a part-time worker versus a full-time worker or even seasonal and temporary workers. Again, these cuts would need to exist in departments that do not directly affect the manufacturing of your product or service. For instance, an office assistant.

Business owners should also be aware that there are grants, subsidies, and government assistance programs that help businesses to become more efficient and save money, especially when it comes to going green, helping the environment, and reducing energy usage. These types of changes also help to make a company more environmentally responsible, which is a plus in the eyes of many employees, customers, and vendors.

Though it takes time and research, looking into cutting indirect fixed and variable costs can greatly save companies money both in the immediate and in the future. The changes made may take some time to get used to, but the reward will be satisfying and highly visible in both your financial reports and your wallet.

A Non-Exhaustive List of Resources:

For more information on energy tax credits, rebates, and savings visit https://www.energy.gov/savings/search. Energy.gov is a great resource for the energy conscious entrepreneur.

The SBA also provides information on state and local energy efficiency programs at https://www.sba.gov/content/state-and-local-energy-efficiency-programs.

Code Green is an organization that helps organizations be more sustainable and go green, they also offer rewards and incentives. More info can be located at https://www.codegreensolutions.com/.

Find information about government grants from the US Department of Agriculture relating to sustainability at https://www.grants.gov/learn-grants/grant-making-agencies/department-of-agriculture.html.

References

Authority, M. W. (2014, March 8). Water-Efficient Toilets. Retrieved from MWRA Online: http://www.mwra.com/comsupport/conservation/toilets.htm

Kokemuller, N. (2016, July 6). Examples of Variable Costs for a Business. Retrieved from bizfluent: https://bizfluent.com/list-6500118-examples-variable-costs-business.html

Lighting Choices to Save You Money. (n.d.). Retrieved from US Department of Energy: https://www.energy.gov/energysaver/save-electricity-and-fuel/lighting-choices-save-you-money

Lohrey, J. (n.d.). Are Advertising and Marketing Expenses Fixed or Variable? Retrieved from Chron: https://smallbusiness.chron.com/advertising-marketing-expenses-fixed-variable-80341.html

Porter, J. (2012, October 17). 10 Ways to Trim Shipping Costs. Retrieved from Entrepreneur: https://www.entrepreneur.com/article/224619

Quarters, C. (n.d.). Cost Benefit of Paper Towels Vs. Hand Dryers. Retrieved from Chron Small Business: https://smallbusiness.chron.com/cost-benefit-paper-towels-vs-hand-dryers-41923.html

Spielman, E. (2018, February 09). Direct Costs vs. Indirect Costs: Understanding Each. Retrieved from Business News Daily: https://www.businessnewsdaily.com/5498-direct-costs-indirect-costs.html

Stahley, B. (2017, February 21). 10 simple ways to reduce business energy costs. Retrieved from SunPower Business Feed: http://businessfeed.sunpower.com/lists/10-simple-ways-to-reduce-business-energy-costs

Sullivan, M. (n.d.). 8 Ways to Reduce Operating Costs. Retrieved from QuickBooks: https://quickbooks.intuit.com/r/expenses/8-ways-reduce-operating-costs/

The business case for energy efficiency investments in buildings and plants. (n.d.). Retrieved from Energy Star: https://www.energystar.gov/buildings/reference/business-case

 

 

 

 

 

 

 

 

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