Fixed Cost Management

From the financial perspective, there are two types of cost that management has to deal with – variable and fixed costs. The variable costs are those incurred in relation to the revenue or sales movement. Variable costs tend to be higher when sales increases, for example in a retail business, people costs such as salary and employee benefits can be increased due to adding of new sales people to support sales growth from new store opening. On the other hand, when sales drop from non-performing store closure, people cost may drop accordingly.

On the other hand, fixed cost has the nature of less fluctuation when revenue changes. These costs may consist of expenses incurred under the supporting departments such as finance, human resource, administrative, and IT. The management will normally review the profit and loss statement (P&L statement) at least on a monthly basis to understand the company’s performance so that necessary action plans can be developed and implemented accordingly.

When the market slows down, sales revenue may drop so significantly that the bottom-line of the business can become negative. It is crucial that the management has to come up with necessary counter measures to mitigate the deteriorating performance. One area to look at is cost controls. As several variable costs are likely to be managed according to the sales trend in short term, the fixed cost is more difficult to be adjusted quickly enough. Therefore, the management may have to look into quick-win alternatives to manage this cost.

Outsourcing measures – Some work at the back end can be handled by outsourcing companies. This choice can alleviate the related costs associated with people. Some expenses such as repair and maintenance, administrative and professional work can be outsourced to third party rental.

Existing contract/agreement review – Certain outside service contracts may be signed for a long time without any review for reasonableness or necessity. It is possible that the company may incur certain costs which is no longer needed. It is worth investigate into this type of regular expenses to find room for cost improvement. Annual bidding for certain contracts – Companies may acquire supplies and service from regular vendors for a long time without proper review on the pricing. As time passes, the unit price of items purchased may not be suitable. In this case, the company may organize an annual bidding with a few suppliers for price comparison and negotiation purposes.

Consolidation of work – There might be open opportunity for efficiency improvement through consolidation of certain different work together. This job function rearrangement and re-organization can help maximize the human resource better and can enhance the morale and career path for a number of employees.

During tough business situation, many companies may choose headcount cut as a strong measure. Instead of drastic action on fixed cost management, the company should consider taking necessary actions early so that the negative impact will be at minimum. Thus, continuous improvement on fixed cost management becomes more necessary.

  • Dr. Yanyong Thammatucharee
    Dr. Yanyong Thammatucharee
    CFO

    Dr. Yanyong Thammatucharee, CFO, Leadway heavy machinery. He has Over 30 years of experiences with education background in accounting and organization development, covering various industries and roles. He worked for Panasonic, Emerson holding regional roles. He is a columnist.

You May Also Like

Business failure by overtrading
Business failure by overtrading

Remarkable sales figures and improved short-term profits do not necessarily indicate ongoing success...

Challenging The FinTech Funding Gap In Asean To keep The Growth Engine Running
Challenging The FinTech Funding Gap In Asean To keep The Growth Engine Running

What is the preferred method for FinTechs to raise money? How much capital do FinTechs hope to rais...

Building a personal set of values - the 6 I's
Building a personal set of values - the 6 I's

Becoming a successful CFO requires persistence, hard work, technical skills, and people and manageme...

The Future of Forex: How to Navigate the Asian Landscape for Maximum Profit
The Future of Forex: How to Navigate the Asian Landscape for Maximum Profit

To get a grasp of the evolving nature of Forex in Asia, it is pertinent that we look through the his...

Entrepreneurship: The Struggles No One Talks About
Entrepreneurship: The Struggles No One Talks About

Success is all about the money, fame, and glory. That’s the constant message we see on social ...

Boardroom commitment to security
Boardroom commitment to security

The subject of ‘Board commitment to security’ is a sensitive and often emotive one. The ...

Blockchain for Claim Management in Insurance Industry
Blockchain for Claim Management in Insurance Industry

Insurance industry has a vast potential for blockchain-driven innovations solving multiple pain poin...

Fraud Detection : Challenges in Real Time Payments
Fraud Detection : Challenges in Real Time Payments

“The financial industry is shifting towards real-time data analysis, deploying technologies su...

Bench to Market
Bench to Market

BENCH TO MARKET Some thoughts from an (interested) observer: #1    having the innovator/...

Risk Management Concepts
Risk Management Concepts

Risk Management Concepts - a practical approach. History, the Persians and risk management, an ex...

Start Up
Start Up

Millennials are now the largest segment of the U.S. labor market according to >Pew Research, an...

Granting Credit & KYC
Granting Credit & KYC

Money cost money. Credit is money. Hence, credit cost money!   Credit also carries an element o...

Money in the bank was never more important than it is today
Money in the bank was never more important than it is today

With the current spread of COVID-19 pandemic, the world has got locked down. It is an unfolding even...

Risk Based Capital- Issues, Challanges and Opportunities
Risk Based Capital- Issues, Challanges and Opportunities

Introduction A Stable insurance sector is encouraging various insurance regulators around the world...

COVID-19: the changing fortunes of industries and how businesses can thrive
COVID-19: the changing fortunes of industries and how businesses can thrive

With no end to the COVID-19 pandemic in sight, how can businesses build resilience and pivot for fut...

The death of Entrepreneur & Entrepreneurship
The death of Entrepreneur & Entrepreneurship

What amazed me was that why a person with a Net worth of 25,000 crores (nearly US 3.6 billion) could...

Stay Connected With Us