The difference between Variable Costs (VC) and Fixed Costs (FC) is, well, VC move in some relationship to production and FC don’t. FC do not change over some period of time, say a year. Because they are fixed we can budget (plan) them fairly accurately. And this gives us some comfort.
The vast majority of discussions on cost cutting, waste reducing or Lean concentrate on the variable costs. And rightly so.
However, sometimes the fixed costs get over looked for a variety of reasons, and herein lies the problem. The reliable non-variable costs begin to creep up; to increase, without a commensurate increase in value. In other words, FC can reduce our profit.
How can this happen? When a firm, with good intentions, focuses on reducing the waste in the VC, they lose sight of the fact that that is only part of the picture. And frequently the assumption is that FC are the solid foundation of the firm with little or no reason/opportunity to impact change.
What to do about it? Stop assuming that fixed costs are fixed! What? That is right. Fixed costs are fixed for the current contract. However, that does not mean forever. At least annually (perhaps during the budget review period) examine each fixed cost line item. Ask questions like:
• What has changed in the marketplace that might cause this expense to go down? Some forms of insurance have come down significantly over the years, for example.
• What has changed in our firm that would provide us a reduced cost? If you have moved from a central office to satellite offices less expensive space might work better.
• When was the last time we comparison shopped this service? You might be surprised at how lazy service providers stop providing widely available discounts because firms stopped asking for them.
The result? Many firms find that by regularly reviewing their fixed costs for ways to reduce them they can increase the bottom line. And this is without a single new customer, product or service.
Contact Build It Backwards(SM) today and let our consulting services give your organization the foundation to succeed well into the future.