Controlling costs is a big challenge. Both seasonal and year round businesses may experience a quick growth in sales but then later realize actual profit margins declined significantly.  Here are four strategies that you can use to control escalating costs and maintain healthy margins.

Measure and Analyze Business Operations

There are two types of costs involved in business operations: variable costs and fixed costs. Variable costs like raw materials and inventory costs are directly linked to production and increase in proportion to production volumes. Fixed costs like rent and insurance are indirectly linked to production and generally don't fluctuate much with minor changes in production volumes.  Identify all your variable and fixed costs and leverage appropriate cost optimization strategies on each.

The first step in managing variable costs is understanding your variable cost per unit of product produced.  To do this simply take the total variable costs incurred during a certain time period and divide by the number of units produced.  Tracking this variable cost per unit is critical in understanding what your pricing should be and when its time to identify cheaper raw material inputs.  

One strategy for reducing variable costs is purchasing raw materials in bulk to get discounts.  You may also be able to reduce raw material costs by limiting raw material inventory.  Tell your vendors to keep raw material inventory until you need it for production. This will free up space and control variable costs. You can also take advantage of inventory management software that would allow for smoother production planning and lower inventory levels.  If you are increasing production the amount of raw materials you will be buying will also will also increase.  Getting periodic quotes from multiple vendors on the amount of raw materials you are buying can lower your variable cost per unit with economies of scale.

Managing fixed costs can be trickier than managing variable costs as it may create growth constraints for your business.  Make sure to develop a 3 to 5 year strategic plan and then assess if your current fixed costs will be able to meet your needs.  If not, identify the right time to invest in better equipment or different facilities.  Many times fixed cost investments in better equipment or more streamlined production facilities can lead to variable cost savings which can be well worth the initial investments.

Leverage Contractors and Consultants

Adapting to new market conditions may require new skill sets to be added to the team.  Growth can also put a strain on existing employees and may require an increase in internal head count.  Instead of simply hiring new staff to meet these challenges, you may want to analyze how existing employees are spending their time.  Identifying tasks that may be eliminated can free up valuable resources.  Hiring a new employee can be very expensive when factoring in vacation time, sick leave and benefits.  Instead for short term needs it may be better to hire a contractor or a consultant that can bring in new ideas and then be let go as demand falls.  Other options may include offering existing employees over time pay or bonus incentives for increased efforts.

Examine your Product/Service Portfolio

All products are not created equal.  Therefore its important to monitor your revenue and profit per product. If you find a few products are becoming unprofitable it may make sense to eliminate these products entirely from your portfolio.  Make sure however that the negative profitability is primarily due to variable costs vs. fixed costs which will then have to be allocated to other products.  Identifying the most profitable products can also allow you to channel your resources on those products that are the most attractive and cost efficient.

Use Technology

Most small business managers need to travel occasionally to meet customers or suppliers. Perhaps it makes sense to minimize this travel by using virtual meeting software such as GoToMeeting instead.  Small businesses can save a lot of money by keeping abreast of and using the latest technology.  Whether its internet based calling to limit telecommunication and travel expenses or new modern equipment, technology can help increase productivity and cut costs as well.

Small business owners face pressure to keep prices low with limited financial and operational resources. Having an efficient cost structure by monitoring every aspect of business operations can allow them to compete with other businesses and profitably grow in their market.

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