In order to run an efficient business you first need to understand
all the costs involved in keeping the doors open. Start by figuring out
the total cost associated with your business on a monthly basis. Then
break out the cost between what can be considered direct costs, and what
can be considered administrative costs. Direct costs are related to the
line employees servicing the customer, while the administrative costs
are related to the business support team that provide Accounting,
Payroll, Human Resources, Sales, Marketing, etc.
Once you have
broken down the direct cost, the next step is to categorize the cost
between variable and fixed cost. Variable cost fluctuates with business
activity, the higher the sales, the higher your labor cost, or material
cost in the case of manufacturing. Fixed costs on the other had are not
necessarily impacted by the fluctuation in revenue that the business
generates. Examples of fixed costs are monthly rent, administrative
staff, telephone, utilities, etc. A business will have these fixed costs
regardless of what happens at the revenue level, if you experience
revenue decline you may be able to move into smaller sized real estate,
but again you can only change your venue so many times before it becomes
more of disturbance.
Industry, or economic changes can impact
your business severely, keeping your cost more on the variable side will
ensure that your business is flexible and nimble enough to change and
cut back in order to preserve cash. By knowing your variable cost you
will be able to calculate your break-even point, which is the amount of
services, or products you need to sell in order to cover all of your
fixed costs. Knowing these figures will also help you determine if you
are running your business efficiently by comparing it to industry
standard. In addition, it will also help you determine your
profitability per unit sold.
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