According to a recent study from insurance and human resources company Tag Employer Services, the No. 1 obstacle restricting business growth at midsize companies in the United States, is “creating greater efficiency.” One great way for startups to reduce the costs of their operations, and focus on efficiency, is to develop a strategy to convert as many of the fixed costs they incur such as rent and utilities, to variable costs such as a sales commission for staff. To reduce costs every fixed cost should be scrutinized for conversion to a variable cost.
There are several industries and markets that present ripe opportunities for outsourcing certain operational needs without having to pay a monthly fee (whether or not you made any sales for that period). These include:
Sales: Instead of hiring full-time salespeople and being burdened with weekly or monthly wages, go with independent sales representatives who work on a percentage basis. You pay none of their expenses. Reps don’t incur the burden of benefits, which can run as high as 30 percent of the salary of a full-time employee. Plus, ineffective reps are easier and less costly to replace than full-time salespeople.
Manufacturing: You don’t have to own a factory just because you want to produce, assemble, store, ship and build your product. Contract manufacturers are happy to do all or some of the above for you. (Find them on search engines or the phone book.) They charge either for the space you take up or the functions you ask them to do. Most will work out a deal with you to charge a percentage of your billing, making this a variable expense.
Contract manufacturers also maintain insurance on your goods in their possession. They cover the cost of their employees’ benefits. This represents a huge saving in fixed and operating costs).
You may have the type of product that would permit you to pay another manufacturer to make it for you under your brand. (This would be their “private label.”) Products like beer, liquor, drugs and computers are often made under this kind of arrangement.
Administration: Guess what? Your billing, sales reports, commission statements, royalty statements, inventory reports and aging reports can also be done on a percentage basis by your contract manufacturer (or a company specializing in doing all the administration for you). Of course, the more functions you outsource, the higher your percentage payment will be. But remember: everything you’re outsourcing is a function that you’re not hiring a salaried body to perform.
And it’s not just bodies, either. Why should you pay for the latest computers and software to run them? By outsourcing administrative tasks, you don’t have to pay the price of obsolescence, which can be very high in the world of computers. Your customers will have absolutely no idea that these functions are outsourced.
Public Relations: Some public relations firms charge on performance rather than the more typical fee basis. A performance-based agreement should be carefully spelled out, with specific accomplishments and their exact costs.
As your company grows and volume increases, there may come a time when the fixed cost is less expensive than a variable one. Before you switch, make sure you can maintain this high volume. Don’t switch on the basis of sales projections or a one-time uptick. As a general rule, investments in overhead should be made only when you have a high degree of certainty about the product, and when customer demand is strong and well understood.
Maximizing variable expenses reduces the amount of capital you’ll need to handle overhead and operating expenses in slow-selling periods. A low monthly fixed expense ensures that you’ll break even (and even profit) faster.
-Brownie Communication Concepts