December 19, 2013

Want A Healthy Business? Keep Fixed Expenses Down

opportunity cost small businessI had a meeting yesterday with a very successful small food entrepreneur who shared with me one of her secrets to success.  In fact, you’d probably say that she’s actually less of a small food entrepreneur and has moved up into the realm of ‘medium’ food entrepreneur given her sales figures and existing operations.  We had gotten talking about how expensive it can be to run a food business and how hard it can be to become profitable and she shared with me a tip she’d gotten years ago that has been a core part of her business strategy ever since.

“Keep Fixed Expenses Down!”

It sounds so simple, doesn’t it.  But the one area where I’ve seen entrepreneurs run into trouble time and time again is that their fixed expenses are too high and drain the business of cash.  As a reminder, your fixed expenses are those that occur on a regular basis regardless of how many sales you have or not.  These are usually things like rent you may pay on a commercial kitchen space, your business phone bill, any business loans, etc.  You know those bills are going to come due regardless of whether you’ve had a great sales month or a terrible one.

Variable expenses, on the other hand, are those expenses that are tied to the production and sale of your products.  So, for food businesses, these are typically things like our ingredients and packaging but you can also count your marketing and sales expenses in amongst your variable costs because you can choose to do pay-per-click advertising one month and not another as your cash flow allows.

If you are able to devise a business model and budget that minimizes your fixed costs as much as possible, you won’t be left counting your pennies and trying to make ends meet if you run into a stretch of bad sales (which happens to pretty much every entrepreneur at some point or another!).  Plus, by lowering your fixed costs that will leave you more cash to put towards things that can help you quickly grow your business (like increased marketing!).

So as you create your budget keep an eye towards keeping those fixed costs as lean as possible to help keep your business on solid, and healthy, footing throughout the coming year.

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