You can improve your profit margins by carefully managing costs. You can find ways to use resources better, but remember not to cut business costs at the expense of the quality you deliver.
What are the different types of business costs?
Cost accounting focuses on several different types of business costs:
- direct costs - such as wages and materials
- indirect costs - such as reconciling bank statements
- operating costs - such as production, overheads or other day-to-day activities
Costs can also be:
- fixed - eg office expenses, rates and utilities, business insurances, loan repayments, etc
- variable - eg sales commissions, packaging costs, freight costs, etc
Some costs, eg labour and materials could be variable or fixed depending on the circumstances of your business. Both types of costs can affect the profitability of your company.
How can I cut costs to maximise my profit?
The main business cost areas you should consider are:
- Suppliers - always try to get the best deal from suppliers. You can try negotiating terms with your current supplier or finding a new one. You may be able to get better deals with economies of scale. Alternatively, buying on a 'just in time' basis could be a better use of working capital. See choosing the right suppliers.
- Finance - review the financial services you use - make sure you are getting the most competitive deal available. Ensure you are using any overdrafts or loans effectively. See cashflow management.
- Premises - decide if you are making the most of the space you have available. You may be able to sublet unused space. Read about choosing business property.
- Production - you may be able to reduce business waste and cut the cost of your materials. You can try to streamline production processes, decrease your inventory or reduce working hours to lower costs. Find out about process and resource efficiency.
You can use activity-based costing to uncover the real cost of specific business functions. Activity-based costing shows you how much it costs you to carry out a specific business activity by attributing proportions of all your costs - such as salaries, premises or raw materials - to specific activities.
It can take some time to carry out the initial analysis of activity-based costing, but it can often reveal costs and potential savings that you would not normally discover using other costing methods.