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Fixed Costs

Definition – In management accounting, fixed costs are defined as expenses that do not change as a function of the activity of a business, within the relevant period. For example, a retailer must pay rent and utility bills irrespective of sales.

The good way to decide how to increase profit by reducing fixed costs (Overheads) is to list them (from your profit and loss statement) and analyse each of them in turn. You could boost your profits by:

  • Moving from your current facility (rented) to a smaller one more suitably sized to the current level of operations as your lease expires. Along with rent, your utility bills may decrease, due to the smaller square footage.
  • Re-evaluate your advertising contracts to save money (and perhaps boosted sales!) by redirecting a lesser amount of money to more effective media for the current market.
  • Consolidating stock (at lower levels adjusted to current sales) into less warehouse space (see previous point about smaller premises).
  • Hire temporary workers. Labour cost are probably one of the largest of fixed cost for many businesses. If you have permanent staff then you are paying their salary and benefits when sales are down as well as payroll expenses. Hiring temporary could help you gain flexibility when the sales is down thus reducing your fixed cost.
  • Hire an outside company to do non-essential work rather than using your own staff to do all the work. Their expertise might be cheaper and also give you flexibility in how much and when you want to get those services done. Ensure that you are not giving them work that is core to your business. You need control over the essential services to ensure quality, consistency and customer service.
  • If you are in an older building and open eight hours a day for five days a week then a simple change like by turning off the hot water heater when the business is closed, and setting the thermostat at 85 degrees or higher when closing in the summer might make a significant utility bill saving.