Disclaimer: I am not a financial advisor or accountant. This article is for informational purposes only. Please use the info at your discretion.
Remember last week when I said we’ll talk about variable costs later? Well, now is later.
Variable costs vary (profound, I know) according to the volume output. These are expenses like materials and labor that it takes to make your product. Logically, if your business increases the number of items it’s making, the variable costs will increase.
Let’s look at an example:
- Say at first, you’re making 100 hats a week. The variable costs to make those hats are all the materials for 100 hats plus the labor cost to make 100 hats.
- If you increase the hats you’re making a week to 1000, you’ll need 10x the materials to make those hats, plus 10x the labor costs.
But that’s not really the whole story, because you don’t have to incur variable costs in a linear fashion. As you grow your business, there are ways to reduce variable costs as you increase output, without sacrificing quality.
Ways to decrease variable costs without sacrificing quality:
- Get volume discounts. Many suppliers offer discounts based on volume ordered at one time. Uline is a great example of this as seen here. You can see on the Uline linked page that price per box decreases as the volume ordered increases. Even if your supplier doesn’t explicitly offer this, it may be worth trying to negotiate a volume discount as your business output grows.
- Shop around for supplies. You want to make sure that you are getting the best value supplies for your money. A cursory way to determine this is to compare supplies from different suppliers to ensure you are getting your money’s worth.
- Create efficient workspaces and processes using 5S. This will likely reduce labor time and the consequent cost.
- Look into technology to reduce labor costs. There may be machines or other technology that will save you money on labor costs, without sacrificing product quality.
- Rework your product. This is a fine line to walk, but it can be done successfully. You don’t want to veer off into poor quality to save money in the short-term, but you also don’t want to be giving excess that creates a less-than-desirable experience. The key is understanding the value that you deliver and protecting it fiercely. A good example of how to do this can be seen in How To Serve A Better Sandwich Without Hurting Your Profit Margin.
Examining your financials and pivoting accordingly can make or break your business. If you’re looking to gain more margin, get down into those variable costs and see how you can reduce them without sacrificing quality. It is possible. Your work to make it better is worth it.
For more on variable costs, check out Investopedia’s video on variable costs. I liked it for the concise summary and added information about the fixed to variable costs ratio.