Did you know?
If you identify your true costs, you can reduce them!
One of the goals of any business is to make profits right? Are you aware of all your costs and know how to account for them in your business?
If you deep dive into your business, you may be surprised to find areas and costs that you can cut. Accountants are very good at identifying this, we bring transparency of your business and communicate it through numbers.
Cost of sales and Overheads
There are two types of spending costs for a business, a cost of sale and an overhead, these are the costs that are used to calculate profit, which in turn dictates your tax.
A cost of sale is a direct cost necessary to create the sale (turnover) in a business, its closely linked to the volume of sales and therefore if you sell more you will incur more of this cost. The overhead is a cost that is incurred whether you are trading or not – a necessary evil as it were for the business!
Examples of a cost of sale would be materials/products for a job, the wages for the lads who are carrying out the job etc.
Examples of overheads are things like rent and utilities (gas/water/electricity), accountancy, salaries for directors and other members of staff (such as management and administration) etc…
Its important to keep these costs separated so that you can identify the true cost of selling your product and delivering it as well as see the full cost of running the business overall. It can help you identify the gross and net profit percentages, which both are good starting Key Performance Indicators to track (KPI).
Just to make it more complicated once you have identified your cost of sales from your overheads, its important to identify those which are fixed or variable in amongst these categories.
Fixed costs are costs that stay the same, each month, unless there a change in price (your supplier has increased their fees). Perfect examples are rent, subscriptions and tax.
Variable costs are costs that change depending on the sales volume and or size of your business. So as your business grows and sells more these costs will grow too. And can include Office supplies, Marketing, advertising, utility costs right down to user licences for software etc…
And then theres the costs that are arguably fixed and variable. Things like a mobile phone, an element of the cost is fixed (service charges) and will stay the same and then there is the variable element (call charges).
How to reduce your costs
The good news is that once you have identified your costs you then can evaluate these costs and look for opportunities to save money! Here are just a few ways of doing this…..
Employees ‘v’ subcontractors
A business needs people and as you grow the business you will variably need more people to help deliver your service. You don’t want to be doing all the work yourself, wearing many hats and spreading yourself too thin and potentially missing out on future opportunities because you are doing it all! On the opposite side if you over-hire, you’re effectively throwing money away.
Now you must remember that when calculating the true cost of peoples wages, this is not restricted to the salary/wage they get paid. . You do need to incorporate holiday pay, pension contributions, National Insurance contributions (NICs), training costs (which could be courses or time you need to invest to train – think opportunity of cost), recruitment and anything else associated.
Before you hire your next person – look at how many staff you realistically need for your business to run smoothly – and think carefully about this. Evaluate the job, how many hours it will take and evaluate the full cost. You many find you only need someone part time.
Another alternative to employing people could be to outsource instead. Consider areas like – the accountant and the website developer. You don’t need to pay Employers National Insurance, there is no holiday or Sick pay, there is no pensions or training, these are people who do their job day in day out and you can get them involved for as little or much as you need to suit your business. If you no longer need the service, you have the option to just stop using it – instead of having to worry about the complexities, rights and responsibilities with the employment law.
Its advisable to look over your supplier contracts every so often. Sometimes contracts with suppliers are no longer fit for purpose and can be for reasons such as cheaper alternatives? Or could be an opportunity to change the level of service, perhaps you don’t need/use all the services available. Its also a good opportunity to negotiate a discount in cases by entering into another contract.
Review your premises, assets and equipment