What are business costs?
Much of business cost can be categorized into fixed costs, variable costs,
and capital expenditures. Fixed costs are those expenses that are incurred
regularly: either daily, weekly, monthly, quarterly or annually. Variable
costs are those costs businesses incur but not on a regular basis. Capital
expenditures are those costs that are incurred when a capital acquisition
is made. An example of fixed costs are utility expenses. An example of
of variable costs are company outings or celebrations. And an example of
capital expenditures are the acquisition of a set of new upgraded computers
for the business enterprise.
Keep more to variable costs than to fixed costs
Whenever one is contemplating to make an expense so that the business will
improve its operations, it is best to opt for making a variable cost rather
than adding a fixed cost. The reason behind this is that fixed costs are harder
to regulate and to change because they are incurred regularly
and at a fixed rate. However, if the expense would be a variable cost, it
is easier to control and to find alternatives for changing
the expense account. One good reason behind this financial strategy is when
prices suddenly rise due to inflation or devaluation, and if your fixed costs
are at its minimum, you can even lessen your variable costs and also
have the opportunity to find alternative ways to lower it,
by looking for another company
that provides a lower cost for the supplies or materials you need.
Whenever possible, find a way to lower your fixed costs
When prices begin to soar, and your business is again strapped with many expense
accounts, not only can you lessen your variable costs, but you can also find
a way to lower the rate of your fixed costs. Whenever you find a company
that services or supplies a product that gives a lower rate for your fixed
costs, then do so. This will help the business enterprise survive the sudden
financial downturn.
Be conservative in your capital acquisitions and expenditures
Capital acquisitions and expenditures take a lot out of the cash reserves of the
business enterprise. So, whenever there is something new to the market and
your present technology is still usable, then do not make a capital acquisition
or expense.
Usually, we are tempted to buy what is new and what is fashionable at the
time that it is released in the market. If the purpose of a capital expense
is always to keep up with what is new, then our cash reserves may be depleted
very fast and before we know it, our fixed costs will be a burden to us. This
does not mean that we must not make capital acquisitions or expenditures to
progress our business and to improve our operations. It only means that we
need to be practical and to use what can still be used and to avoid the
temptation of 'keeping up with the Joneses'. There is a right time to update
our systems, procedures, operations and programs. We only need to make the
capital expenditure at the proper time in relation to what the financial
situation of our business tells us, and not according to the dictates of
newness and modernity.
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