To plan for the financial future of your small business, you must first estimate the amount of money you will need to create to cover all of your current and future costs. How do you budget well if some of your expenses change from month to month?
That’s the issue with variable costs. They are notoriously difficult to predict because, as their name suggests, they vary considerably from one instance to the next—sometimes even over the span of a single month. It is in your best interest to reduce these costs as much as possible and to acquire the knowledge and expertise you need to prevent them from putting your business to an abrupt halt. Having a firm grasp on variable costs requires first knowing what they are.
What exactly are “variable costs?”
The proportion of a product’s price that goes toward variable costs is proportional to how much of that product or service is used. There are two common mental models for spending that are subject to change.
Cost of operations: Expenses like gas and automobile maintenance, as well as the cost of office supplies and professional labour by the hour, are included here.
The price at which products are sold Variable costs, which include items like direct labour charges, sales commissions, and raw materials, tend to rise in tandem with production and output levels. For personal variable expenses it works fine.
When compared to expenses that cannot be changed, such as rent or utilities, how do discretionary, variable expenditures differ?
The daily fluctuations in variable costs translate into monthly and yearly variations in total outlays.
On the other hand, fixed costs remain constant regardless of changes in output, and even if they do change, they are unrelated to production levels. Fixed costs include things like rent, insurance premiums, loan payments, subscription fees, and wages. It’s easier to plan a yearly budget around fixed costs if you assume they’ll remain constant throughout the year.
Discretionary spending poses a little greater difficulty: Expenses like office parties and incentive payments fall under the category of “good to have” only when money is available for further business expenditures.
The final price tag for these outlays might go up or down based on the decisions you make and the outcomes you experience. You may have a pizza party for yourself the day before the month finishes if it has been a particularly good one. On the other hand, it’s quite feasible that neither your variable expenses nor your discretionary charges will ever appear in an accounting statement.
How much of an effect will my budget’s variable expenses have?
To a certain degree, the variable costs regulate themselves. To put it another way, if you slow down production, your costs will go down since they are proportional to that. Due to your limited agency, you are unable to establish adequate contingency plans.
It’s trickier to plan for overhead variable costs since they’re harder to change. Knowing whether and when these prices are going to rise or decrease is useful. For example, many people’s electricity bills skyrocket in the summer because they keep their air conditioners on all day. Waiting until the last day of the month to pay your energy bill might throw off your budget since it will be significantly more than the amount you made the previous month.
How can I reduce these expenses without going into debt?
Now that we know how variable costs may throw a wrench in monthly budgeting, here are seven strategies for staying one step ahead of these challenges.