How to Optimize Fixed Costs for Small Businesses
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For many small businesses, figuring out how to optimize their fixed costs can be a major challenge. There are a variety of factors involved, and the process is not an easy one. Just to refresh our memory; the fixed cost is the total cost of production incurred by a business before any variable costs.
It is the most common type of cost for small businesses and it is a cost item that does not change with the level of production.
Fixed costs are typically divided into two categories: fixed costs and period costs. Lots of small business owners are left scratching their heads wondering how they can find that sweet, optimal balance in their costs. Without guidance or in-depth research, this can be overwhelming and quite frustrating.
Although there are many ways to optimize costs for a small business, it is important to start by analyzing your current spending habits and making a list of all the fixed costs that your business incurs each month.
We created a helpful walkthrough to help you optimize the costs of your small business. Take a look at our comprehensive guide and learn how to get started on the right foot. We will walk you through how to optimize your fixed cost, how to identify optimization possibilities, and how you can optimize your fixed expenses so that they work better for your business’ needs.
First, you need to understand that fixed costs are the costs that do not change with your level of production. They are fixed because they are independent of the number of units produced. To recollect what we have already explained in the previous article; they can be divided into two categories:
1) Fixed costs that do not vary with production levels: These include rent, insurance, and property taxes.
2) Fixed costs that vary with production levels: These include raw materials, utilities, and labor.
The goal is to minimize fixed costs by reducing them or eliminating them altogether, if possible.
Start doing more with less
Doing more with less is a necessity for growing businesses. Compared to big-name competitors, small brands often can’t afford to spend as much on marketing as they would like to. Fixed costs take up a bigger share of the budget, making it difficult to make an impact on customer acquisition.
You can get the edge on big-name competitors by putting time into research and informing yourself of the bigger picture to optimize your business’ costs.
How can small businesses go about fixed cost optimization?
The first step is to identify your fixed costs. They are those associated with operating a business, regardless of the level of production. These include rent, insurance, utilities, and salaries.
Next, we need to identify the variable cost per unit. Variable costs are those that depend on the level of production. These include raw materials and labor.
What are some fixed cost considerations for small businesses?
Retailers should always be looking for ways to optimize fixed costs. As mentioned, those are the overhead expenses, such as rent, utilities, and insurance. To provide an example, AI can be used to optimize your costs by identifying any inefficiencies in your supply chain and reducing the amount of inventory that is carried.
How can a company save on fixed costs?
Because fixed costs are the costs that do not change with the level of production, there are a few ways to optimize them for your small business:
- Reduce overhead expenses by negotiating better rates for utilities and insurance. Hint: Check if there are any subsidies to change your electricity supplier with a non-hydro renewable energy (primarily wind and solar) supplier.
- Reduce variable costs by cutting back on inventory or outsourcing production to a cheaper location. The same goes for your business’s main location. It’s worth keeping an eye on the real estate market to see if there’s anything you can rent for cheaper in your desired area. Another alternative includes a shared location where you’ll be sharing the premises with another business, thus seriously cutting on your costs. You should also see if a home office location is suitable for your line of business and operations.
- See what others are doing and don’t be intimidated to join business discussion groups, forums, and what social media has to offer. You will find a wealth of information and meet business owners who think creatively.
- Try to outsource certain aspects of your business to see if it would help reduce your costs. By outsourcing the right services at the right price point, retailers can extend their resources more.
Seek a solution-based approach
There are a number of technologies, softwares, apps, and service providers to assist almost every aspect of small or retail businesses. Take the time to learn what they offer and how using these services can be beneficial to your business in terms of fixed-cost optimization.
A great example of this is Metrobi. Designed for wholesale and home deliveries, Metrobi is a local delivery service for retail businesses. Much more than a courier service, we are ready to become a part of your business in no time as a reliable partner.