Understanding whether your business is cost efficient is obviously the key to ensuring you are making your goal profit.
Firstly, you need to understand that there are two types of costs. The first are variable costs: costs that increase and decrease as we sell our product or service. For example, in a service based industry a variable cost, a cost that increases and decreases as you make more sales, is the cost of your subcontractors. If you’re a product based industry, an example would be the cost of the product that you buy and freight which will increase and decrease as you make more sales.
The second type are fixed costs. These are items such as your rent. No matter how high or low your sales are your rent will remain the same month to month. You need to consider the efficiency of your fixed costs and how these fixed costs are either feeding or draining the profit in your business.
Understanding these two elements is the key to understanding and making sure your business is cost efficient.
Speak Your Mind