Developing your cost structure as you pivot your business
They say cash is king, but so are your costs. Controlling and understanding how much money goes out of your business is just as important as knowing how much is coming in. Let’s take a look at the biggest costs when you’re in business and how to control them.
First, understand the difference between your fixed and variable costs.
Some examples of fixed costs are:
Some examples of variable costs are:
“Minimise your fixed costs wherever possible. This gives you flexibility to deal with revenue fluctuations to meet operating costs,” notes Coco Hou, managing director of Platinum Professional Training and Platinum Accounting.
Australia’s top gourmet fairy floss business Fluffy Crunch has recently moved to an online model and its cost structure has totally changed. “Some costs have disappeared and others have increased,” explains founder Michael Karamallis.
When it was selling primarily at events its costs mostly comprised van hire, staff and commission on sales. Now, its costs are mainly around packaging such as tubs and labels for its scrumptious flavours, which include pina colada, fluffy-tella and crushed cookies. “We used to order tubs twice a year, but now we have to pre-order them. But overall, our costs are lower,” he says.
Northern Building and Carpentry founder Bill Arwas says materials and labour are his key cost “Usually 80 per cent of a quote will be materials and 20 per cent will be labour. It’s very important to get those costs right to make sure you price a job correctly.”
Arwas always has an eye on cost management. “If you’re a loyal customer you can often ask for a better rate.” The flip side is occasional price increases for certain materials. It’s important to factor these in when pricing jobs to maintain profit margins.
Hawt Shot Café is a great example of a business that has scaled back fixed and variable costs. It’s negotiated lower rent and found better deals for gas and electricity. It’s using staff to do home deliveries, rather than use a more expensive online platform. It’s done away with tablecloths, slashing laundry bills, and redone its menu to reduce food wastage.
Your most important costs
Staff is a big expense for most businesses, including virtual employees, contractors, sub-contractors and outsourced staff.
“Wages are almost half our costs,” says business growth adviser Caren Hendrie. “This rises to about 65 percent of expenses when we include superannuation, payroll tax and WorkCover.”
Hendrie recommends putting in place KPIs for staff to critically assess each employee’s productivity. These include revenue per employee, sales per employee or time taken to complete different tasks. This gives the business a basis to work out who’s contributing to revenue. Then it’s an idea to put in place strategies to manage staff costs such as using casual labour and freelancers.
Marketing is important to accelerate your business. But it must be extremely targeted and focused on solving customers’ pain points.
“Investing in brand awareness is to grow sales and market share quickly. Spending money on public relations, social media and advertising is expensive but essential,” Hou adds.
This does not need to be expensive. Delegate social media strategy and tactics to one of your team members and make sure it’s something they work on every day to generate brand awareness and raise your company’s profile. Another idea is to do some joint marketing with a similar business to make your marketing dollar go further and to give your business access to a different target database for free. Even local sponsorship opportunities – for instance local football or netball teams – are a great way to get your business name out there.
It’s a great idea to do a technology audit to make the most of your tech. Look at what you’re paying for versus what you’re actually using.
Also explore cloud-based systems that integrate payroll, sales, customer relationship management, inventory control and financial management. “Having these capabilities in one place means fewer systems, costs and simplified management,” Hou says.
Of course, investing in this area is also one way to save money. “New technology will definitely improve your cost structure,” says Peter Thorp, director, Australian Bookkeepers’ Centre.
Building firms are a great example. Investing in the latest cordless drills, power saws and even electronic tape measures means jobs are completed faster, allowing the team to move on to the next assignment more quickly.
There are real opportunities to look for cost savings in this area. This is one of the reasons why networking is so important. It gives you the chance to build relationships with different potential suppliers, find out what they offer and negotiate a discount or contra.
“Look at what you’re currently paying and compare it to the market average by making a few calls to see what different businesses charge. Don’t simply change suppliers based on price. But do get a feel for the market. It’s also worth talking to your suppliers to see if there’s a deal available or a more cost-effective way of doing things,” Hendrie adds.
You can also make savings by ordering in bulk or being part of a co-op arrangement to buy large quantities of common supplies with other businesses in your industry to save money. This has meant huge savings for local baker Buns on the Run. It buys flour, sugar and milk with two local cafes to reduce its input costs.
It used to be the norm for businesses to sign fixed, five-year lease terms. But many are challenging this norm now as so many people are working from home. Explore how you could save money in the future on this cost.
“Serviced offices are popular because of their flexible nature. Many businesses are going in this direction instead of locking themselves into long-term leases,” says Hou.
This is a good option for professional services firms and sole traders, who can often work from home most of the time and use a serviced office to meet with clients when necessary.
It’s really important to pay the right amount of tax. But it’s equally essential to take steps to reduce the tax you pay to help manage your costs.
One way to reduce tax is to buy plant and equipment you use in the business and deduct the cost of this expense for tax purposes, making sure you’re not risking cash flow by doing this.
Some of the ways to generate a favourable tax outcome include:
- Making extra superannuation contributions
- Taking advantage of tax incentives that allow you to claiming 100 per cent of the cost of capital equipment up to $150,000
- Deferring income
- Prepaying expenses and interest
Loss carry back rules – if you have made or anticipate making a tax loss in a current year, you can estimate the tax loss for those years and use it to offset profits from a previous year. This could result in a cash refund for tax previously paid. Learn more about it on the ATO’s website and find an accountant or bookkeeper here.
How to reduce your costs
Once you understand your expenses you can make decisions around how to reduce them.
“Don’t make knee-jerk reactions and stop spending altogether. That might ease things short term but it could cause damage long term. You still need to do things to move your business forward,” Hendrie advises.
Three areas to review include:
- Things you’d forgotten you were paying for
- Things you’re paying for but don’t really use
- Things that you can live without and won’t mean your business falls behind
Any decision about cost-cutting has to involve a cash flow projection, so you can work out how much you have coming in, how long you can make it last and what you can afford to pay for, taking into account any seasonality in the business. You also need to know your breakeven point – the minimum amount you need to sell to cover all your overheads.
"Don’t make knee-jerk reactions and stop spending altogether. That might ease things short term but it could cause damage long term. You still need to do things to move your business forward"
Caren Hendrie The Hendrie Group
Developing new, low-cost products and services
Digitising your existing products and services is a great way to build a lower-cost suite of products. The idea is to develop a more streamlined, online product you can use to create a whole new market alongside your existing market. It’s likely some customers will prefer to use the new, digital offer, while others will prefer to go online.
Physiotherapists Let’s Get Physio are an example. The business has developed a new service delivered via video call, which has allowed it to scale up the practice and expand the client base. Many other businesses can take a similar approach.
If you’re just starting out, check out our useful blog about how to price your services.
Disclaimer: the information provided above does not constitute tax advice and independent tax advice should be sought.
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