April 20, 2024

You’re the Boss: Not All Fixed Costs Are Truly Fixed

Thinking Entrepreneur

There are variable costs that go up and down with volume, and there are fixed costs that don’t change. It is a pretty simple concept, and one that is important for business owners to understand if they are going to make intelligent pricing and budgeting decisions.

But even fixed costs aren’t necessarily fixed forever. In fact, if reviewed carefully, they can be a treasure trove of new profit. Benjamin Franklin liked to say that a penny saved is a penny earned. I’m guessing that many business owners could save a lot more than pennies on their fixed costs, and those savings — potentially tens of thousands of dollars — fall right to the bottom line.

While this has always been true, it is even more true today with recent changes in technology and the current economic slow down (if your business has fully rebounded, more power to you). Here are some things I have done recently that I believe have saved or will save significant dollars:

Switching light bulbs. Actually, the people in the trade now call them “lamps.” I have no idea why they call them lamps, but why spoil their fun?

I have about 500 65-watt halogen lamps, each of which use about $35 a year in electricity. That is about $18,000 per year, or half of my electricity bill. There are new LED lamps that cost only about $6 per year. For me, that is a savings of about $15,000 per year in electricity, not including the savings in air conditioning that will result because the lamps are much cooler. But, yes, there is a catch.

The bulbs cost about $50,000, including sales tax. The electric company has a rebate of $10 per unit, which brings the investment down to $45,000. But the bulbs last 50,000 hours, which is 15 years in this case. (Because of the scale of my project, I have done a good amount of research and have found there are different qualities of lamps, and some are not very good. There is also a big variance in the quality of the light.)

By contrast, the Halogens last 3,000 hours, or about a year. What does it cost to change 500 bulbs a year? Maybe $10 each with labor. That is another $5,000 per year in savings. There are also some tax savings because you can deduct the cost of the lamps this year. (Talk to your accountant) Add it all up and it means a payback of less than two years. From then on for the next 13 years: ka-ching! (I grew up using an old cash register.)

How much business do you have to do to net another $20,000 per year, every year? What’s more, these are green savings, which are always better. One of my key people brought up the fact that the prices are sure to fall, as they do for any new technology. I’m sure he is right, but I did the math. Every month I wait for the price to drop, I will lose about 3 percent of the price of the lamp in electricity charges. The price of the new lamps are not going to drop that fast.

There have also been advances in fluorescent lighting with electronic ballasts and high output lamps. If you are still using the same standard lamps (T12’s) that have been around for many years, you are going to have a problem finding them and the ballasts because they are being discontinued. Fixtures can be retrofitted to accept the new thinner T8’s with electronic ballasts. There are also companies out there who will bid for your electric business, which could save you even more.

Switching telephone technologies. I have five different businesses, all with different phone and fax lines. I never paid that much attention because it was a fixed cost. But that was old-school thinking. New school, we have begun looking into VoIP, voice over Internet protocol. We will probably save another $10,000 to $20,000 per year. We don’t have this one figured out yet, so please chime in if you have suggestions.

Switching locations. I’ve written about it before, but it bears repeating. Real estate costs have dropped dramatically over the last three years. Have you checked out the market? I have significantly reduced my warehouse/factory cost, and I have better space.

Many businesses have gotten leaner over the last several years and have gotten hungrier for new business. We have gone through every fixed and variable cost to be sure that we are taking advantage of the new climate. I guess you could call that making lemonade out of lemons.

The bottom line, literally, is that profit is revenue minus expenses. Most entrepreneurs spend their time chasing new business. It is equally effective to chase expenses. Have you had any savings breakthroughs?

Please tell us!

Jay Goltz owns five small businesses in Chicago.

Article source: http://feeds.nytimes.com/click.phdo?i=1ed352a77b7ef5eb98501f61c11668e2

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