Variable costs affect your business budget because they fluctuate weekly or monthly. When the total cost of an expense fluctuates in line with changes in production, sales, or some other activity, it is referred to as a variable expense. The expenses are necessary to run your business. Examples of these expenses include.
- Payments for utilities
- Costs associated with driving, such as gasoline and maintenance
- Office equipment
- Professional services provided on an hourly basis
- Hourly employee payroll
- Raw materials
- Shipping
How do they impact your business budget?
The overall variable expenses analysis will determine how you budget and plan your business. The previous variable costs will likely impact any strategic goals, including expansion, downsizing, or introducing new products. How you plan to manage the future variable costs will also impact such goals.
Sometimes shifting costs is complex to control, making it hard to budget. Factors that may make it hard include weather changes, inflation, etc. These are factors that hit you unaware. To ensure that variable costs are not destabilizing the business, you can cut the variable costs that are not that important.
Variable costs will rise in proportion to the amount produced and the output. The variable expenses related to production will, on the other hand, go down when fewer products are created.
The expenses determine the pricing of goods and services. As a business owner, it is in your interest to price your products competitively to reimburse the cost of production. You should understand the inputs for its products and the amount of revenue per unit it has to collect to ensure profitability by undertaking variable cost analysis.
Variable costs affect the break-even point of your business. Fixed costs divided by contribution margin, determined as revenue less variable costs, yield the company’s break-even point. You can use variable cost analysis to determine how many units must be sold to break even and how many units must be sold to generate profit.
How can you reduce the impact of variable costs?
- Knowing the annual average of each variable cost in your budget. Ensure you spend time reviewing the past year’s average variable costs. Using a one-year evaluation is not enough. This will enable you to consider any abnormalities that can affect the average cost of an expense in the future.
- Adding a buffer. After calculating the average variable costs, you should add a buffer to cover price increases and the majority of abnormalities that may cause an outlier year for the expense.
- Tracking your spending. You should compare your actual monthly expenditure on each variable cost to the allocated budget. This will help you identify whether you are underspending or overspending. A profit and loss budget would help with such analysis.
Conclusion
It is in never in anyone’s interest to be thrown off the rail by a budget and plan to fail to work as anticipated. You may be in control of some factors and not of others. Failing to plan will make it hard to handle random aspects. Building a buffer will always aid you in such situations.
