How to control fixed costs
Article by Patrick Sutton, Partner, O’Kelly Sutton, published in The Sunday Business Post 28th January 2018
One of the easiest mistakes any business can make is to let fixed costs creep up over time. Whilst costs are a necessary part of any business, when they get out of control it can have a crippling impact on the business. Managing costs is not sexy; there are many more interesting actions business owners could be concentrating on. However cost control is within your power and is a key driver to delivering profit and saving cash. First, some general advice.
Every business should prepare annual budgets at the beginning of each year. This is an opportunity to review the previous year’s actual costs, determine what can you afford this year and plan where the money will be spent.
It needs to be a line-by-line exercise where you carefully analyse the requirements of the business for the coming year. The process of preparing the budget is probably more important than the budget outcome itself – it is an essential learning exercise for the business owner.
Record transactions in a timely manner
You should have an easy-to-use accounting system for recording daily transactions. Most businesses are now using cloud-based accounting systems that are easily affordable with no upfront costs. Many early-stage businesses choose to outsource the bookkeeping and accounting functions as funds may not be available to employ such resources.
Measure the results
Monthly or at least quarterly management accounts should be prepared and then compared to budget. Variances against budget should be investigated and corrective actions taken. The review of financials is a key element in managing any business. It may be that you require training or assistance to understand financial reports and how they can be used to make real-time decisions. Our experience in working with SMEs is that those who prepare regular management accounts are substantially more profitable than those who do not.
Eight specific examples of what businesses can do to control or reduce costs
1. Reduce travel costs
Where possible, eliminate travel, replacing trips with conference calls, emails, or video meetings. If you must fly, plan well ahead to avoid the high cost of a ‘sudden’ trip. Increase the scrutiny of your expense accounts to send a clear message to your staff that costs are important. When you travel, stay in business hotels only; luxury hotels should be off limits. And everyone who travels should be a member of the affinity group sponsored by that hotel in order to gain discounts and free nights. You should already be aware that travel and subsistence rates changed on April 1, 2017 so your records should reflect this. Don’t be afraid to negotiate the best accommodation rates – there’s always a deal available.
2. Limit travel and entertainment expenses
Client relations are always important and should never be compromised. However, face-to-face meetings or entertaining clients should not be without limits. Establish an entertainment policy that fits the economy and your business; your clients and prospects will understand since their company is probably implementing similar policies.
3. Rent – don’t buy – premises
Avoid long-term lease agreements, sublease where possible, outsource resources to reduce space requirements.
4. Make sure your building structure is efficient
Is your building properly insulated? There are many premises where the cost of heating could be substantially reduced by a small investment in insulation. The layouts of offices are often inefficient and poorly thought-out and not conducive to productive working.
5. Reduce motor expenses
Hire rather than buy – there are many hire/rent options with no upfront outlay. Purchase fuel through fuel cards from approved garages. Enter into company-negotiated car servicing and maintenance programmes.
6. Outsource where possible
The single biggest burden on most small businesses is labour costs. Professionals can be expensive, therefore many companies are outsourcing their HR to save money. Keep an accountant on a fixed-price retainer which will work out cheaper than having one on staff, and data entry can be done anywhere in the world. Information technology and cyber security is becoming increasingly necessary for small businesses, making outsourced managed IT services an appealing alternative to an in-house team. When services are brought in-house consider part-time positions until the business has the resources for full-time positions.
7. Review contracts
Review and renegotiate contracts every year such as telephone, electricity, audit, stationery, IT, hire, etc. It’s amazing what results can be achieved from analysing and querying contracts – small savings can add up.
8. Reduce miscellaneous spending
Too often, spending is ad hoc and not in accordance with the budget. There should be a sign-off process for all expenditure, even in small businesses. Fixed costs are within your immediate control so there’s no reason to let them become a problem. It takes some discipline and a little foresight to get the balance right, but remember: it’s much easier to save a euro than to earn a euro.
Patrick Sutton is founding partner at O’KellySutton, a company providing a range of accounting, financial planning and taxation services to Irish businesses. For more details, email firstname.lastname@example.org