Avoid fixed costs

Every teardrop is a waterfall

A healthy start up business must be flexible and ready for unexpected changes in demand.
Key to building this flexibility into your business is to minimize fixed costs and overhead.
First of all, what are fixed costs? A fixed cost is any cost that will remain the same, regardless of changes in your sales volume.  A good example would be car lease payments.  Sell more or sell less, your car lease payment will still be $299 this month.  Rent, employee salaries, and monthly service provider fees all increase your fixed costs, and should be minimized.
Instead, structure your business to have more variable costs.    Don’t pay salaries to employees.  Instead, hire independent contractors to do individual jobs.  Don’t rent warehouse space; pay a per-piece rate for storage.
As an example, book publishing sites will entice you to pay a monthly fee for premium services.  You will have to pay this fee whether you sell 1,000 books, or no books at all.  Therefore, think very carefully before you click the box to increase your overhead.
[Image: Every teardrop is a waterfall by dollen, on Flickr]

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

4 Responses to “Avoid fixed costs”

Trackbacks/Pingbacks

  1. What you can learn from Apple « Accountinator - February 16, 2012

    […] retailers had to pay the full range of fixed costs: rent, utilities, salaries and […]

  2. When will you break even? « Accountinator - February 23, 2012

    […] you to set prices, monitor your profit performance, and manage your costs.  I have long advocated for keeping fixed costs as low as possible.  This type of analysis will help you to understand how to become more financially flexible and […]

  3. Hire independent contractors, not employees « Accountinator - May 31, 2012

    […] disability, occupational safety, and more.  A well-trained and loyal workforce also creates huge fixed costs which you will have to meet every month before you can post a profit. Therefore, structure your operations to hire independent contractors […]

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