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How to Identify Fixed and Variable Costs to Unlock Cash Flow Solutions in a Crisis

Understanding the differences between your business fixed costs versus variable costs is key to identifying opportunities to unlock cash flow, particularly during lean times or times of crisis.  Fixed costs are predetermined expenses that remain relatively constant throughout a specific time period.  No matter how high or low your sales are, your fixed costs will remain unchanged.  Conversely, your variable costs are directly associated to the activity or production levels within your business.

Some of the most common types of fixed and variable costs include:

Fixed Costs – predetermined expenses that remain relatively constant for a specified period

  1. Rent
  2. Property Taxes
  3. Salaries
  4. Insurance
  5. Loan Payments

Variable Costs – expenses that are directly tied to sales or production levels within your business

  1. Raw Materials
  2. Supplies
  3. Commissions
  4. Hourly Wages
  5. Shipping

When you’re steering your business through an economic crisis, you can look to variable costs to guard against cash flow problems.

Here are five ways to manage variable costs to keep the cash flowing:

1. Negotiate with suppliers

If you’re looking to cut down on outgoing cash, start with your supplier. If you’ve been with the same company for a while, shop around again to see if there’s a better deal elsewhere. Even if you’d rather stick with your current supplier, providing a cheaper quote from a competitor can help you negotiate for a lower price.

If you’ve been working with several suppliers, try offering to move all your business to just one of them in exchange for a deal. Also ask about discounts for high-volume purchases and see if you can change your purchasing schedule to take advantage of any discounts available.

2. Root out inefficiencies

Identifying all the little inefficiencies that hurt your bottom line requires an audit of all your business processes. So where are you wasting time? Start by looking for steps in every process that can be automated. For example, you might be able to automate certain emails without sacrificing customer service.

Multitasking is sometimes necessary in business, but it’s not efficient, and no one really does it well (no matter what their resume says). Look over your and your employees’ workday to find any multitasking inherent in the schedule. See if you can separate tasks so that everyone is mostly doing one thing at a time.

Finally, look for bottlenecks and redundancies. Is there a process that gets frequently delayed as it waits for final approval from a single person? Consider whether every gatekeeper is necessary, and ask yourself whether there are others with the knowledge and judgment to make the call.

3. Push goods and services with bigger profit margins

You’re probably not selling all your goods or services at the same profit margin. Focus on those that have a high margin, and eliminate or reduce those that offer a small margin but require a larger investment or higher costs.

If you offer special options or custom services, make sure your customers are aware of them. One strategy is to offer packages that bundle a popular low-margin item with a high-margin item you’d like to boost. Rush jobs and custom orders, while they can be a headache, may allow you to make up-charges that increase your profit margin and are a boon to cash-flow.

4. Identify and Scrutinize Every Variable Expense

Take the time to review every expense and ask yourself the following questions: Does it add value to my bottom line?  Are there other options?  Can we do without it?  Are there better, faster cheaper ways to do things?  You will be amazed at how much you can save or do without, especially during times of crisis.

5. Lean on social media

When you’re looking for variable costs to reduce, you don’t want to end up underfunding the things that bring in sales, but a shift in marketing tactics can pay big dividends down the line. Moving your promotional efforts from legacy media — TV, radio and newspapers — to social media can be a way to cut expenditures while continuing to engage with your customers. If social media is already your sole marketing channel, look at what you’re spending on paid promotions and consider using unpaid posts that rely on organic interest. And if you’re currently paying a social media manager, see if there’s anything you can take on yourself. Doing so will require extra time on your part, but if your priority is cash flow it might be worth it. 

Once you have a better understanding of both the fixed and variable costs associated with your business, you can manage them more effectively and identify opportunities for expense reductions to help improve your cash flow and bottom line.  Some of these changes may be temporary band-aids to hold your business together until the economy climbs back out of the hole it’s in. But you may find that others are just good policy, no matter the economic climate—and they'll put you in a better position to weather the next crisis.