Every business has two kinds of costs: fixed and variable. Fixed costs remain, well, fixed even as you increase output. Variable costs change as the number of units of a good or service goes up.
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Smart entrepreneurs know that they have to address both if they want to be profitable. Conducting effective business isn’t just a matter of pulling in as much revenue as possible, it’s also about doing it at the lowest possible cost. Companies like Facebook know this well, which is why they work so hard to keep their “cost of revenue” to a minimum and achieve fabulous net profit margins.
Many companies, however, fall into the trap of high costs and become uncompetitive. Here’s how top entrepreneurs slash both fixed and variable costs.
They Do Not Invest In Office Space – At Least Not At First
Office space is expensive. Not only does it cost a lot of money to rent and run, but it also has associated business rates which can easily add another 40 percent to the cost. Top entrepreneurs, including Elon Musk, have worked for long periods of time without office space to save money. In today’s connected world, it’s often not necessary, especially with tools like Zoom and Slack which allow you to coordinate remote workers.
They Reduce Funding Costs
While racking up debt on credit cards might be easy, it’s certainly not the cheapest way to get financing. With average interest rates between 20 and 40 percent per year, businesses who raise money with credit cards end up paying the price later on.
Specialized business loans are often a lot cheaper, coming in at around 15 to 17 percent according to Debasish Dutta, director at Orange Corp. Global. But smart entrepreneurs know that they can get money even cheaper than this if they go to an angel investor.
They Don’t Use In-House IT
In-house IT came about during the early years of universal computer ownership. Before the advent of the cloud, it was a necessary overhead. But today, it’s all but irrelevant for most businesses.
What is VPS hosting and how does it work? VPS hosting – or virtual private server hosting – is a cloud-based technology that allows businesses to rent and use server space over the internet. Rather than buying the server itself, VPS hosting allows companies to use the server space provided by a third party. This arrangement helps to save costs over traditional IT while making scalability much easier.
They Don’t Commit To Fixed Expenses
Some businesses have to commit to fixed expenses to keep their operations going. But many do not. Fixed expenses are problematic because they can dominate costs if revenue is low. No matter how successful your business, they remain the same. Dutta advises that businesses think carefully before committing to any fixed costs. They need a clear idea of their revenue stream in the future to ensure that any investment is worthwhile. Fixed costs can quickly spiral out of control, and can lead to company failure if demand does not pick up as predicted.
