Are you a business owner struggling with how to calculate costs for your business?
Business finance is a broad and complex subject, so we understand how frustrating it can be. This article will walk you through how to calculate your business costs and a few ways to reduce them.
Let’s dive into it.
Calculating Business Costs Is Essential
When we talk about costs, we’re talking about how your business incurs expenses to provide the goods or services you sell. For your business to be profitable, your costs need to be less than your incoming revenue.
Without a profit margin, your business can’t survive, let alone pay for materials or staff. The first step to maintaining and growing your business is knowing how much it costs to run your business.
How to Calculate Costs for Your Business
There are two types of costs that affect your business, fixed and variable. You’ll need to calculate both to keep your business finances under control.
Fixed Costs
To begin calculating your total business costs, we need to look at your fixed expenses. Examples of fixed costs include your building lease, equipment, software subscriptions, insurance premiums, and loan payments.
These costs are your overhead costs or operating costs and the expenses you have to pay to keep your business running.
Variable Costs
Variable expenses are costs that are directly affected by the number of services or goods your business produces. Some examples include utilities, workers’ wages, shipping/delivery costs, and the cost of raw materials to create your product.
Because these costs fluctuate, it can be challenging to predict their exact value from month to month. The best way to estimate these costs is to review their totals from previous months or business quarters.
For example, to estimate how much wine you could expect to sell this holiday season, you’ll want to review how much you sold the previous year during the same time frame. While this method won’t give you an exact cost figure, it can provide you with insight into what to expect.
Reduce Your Cost of Business
There are multiple methods to consider when you’re looking to reduce your business costs. We’re going to touch on a few of the most effective to get you started.
Negotiate Better Pricing
A common pitfall for businesses is paying for more materials or services than they need. By reviewing your business resources to see how much of a good or service you’re using, you can make adjustments where necessary.
When you have an accurate picture of your business needs, you can negotiate a better price for your vendors’ resources. Your resource needs will fluctuate as your business grows, so remember to review your vendor contracts on a semi-annual basis at the minimum.
Seek Affordable Alternatives
Sometimes the resources you use for your business have a more affordable option available on the market.
For example, when it comes to business software, many businesses rely on Microsoft products. If you wanted to secure a minimum of 200 hours of Microsoft support, you could expect to pay upwards of $53,000. Thankfully, there are more affordable Microsoft Premier Support alternative options available.
Leveraging more affordable alternatives can be an excellent way to cut your operating costs.
Consult a Financial Advisor
When in doubt, consult with a financial advisor. Using business finance programs or a financial advisor, you can gain an objective view of your business costs. A professional with a trained financial eye may see cost reduction opportunities that your team may have missed.
Business Finance Control Is Crucial
As we’ve discussed, knowing how to calculate costs for your business is vital to your success. While we’ve touched on some key ways to manage your business’ finances, there is always more to learn.
What are some of the ways you’ve used to save your business money? Let us know in the comments below.