Reliable, proactive accountancy services for great small businesses.
August 2nd 2018

Understanding cost drivers in your small business

Understanding your costs and how they behave plays a key role in managing your small business’ finances and cashflow. Knowing when costs are incurred and how, can enable better planning and ultimately improve your bottom line.

Cost can be categorised into the following:

Fixed

Fixed costs are costs that are predictable in terms of amount and timing;

  • Monthly rent payments
  • Quarterly telephone line rental
  • Annual licence fee

Variable

Variable costs will fluctuate depending on certain “cost drivers”

  • Electricity costs based on usage
  • Fuel based on fuel price
  • Professional fees based on hours charged

Linear

Linear costs are incurred in uniform manner;

  • Monthly rent payments
  • Quarterly telephone line rental
  • Annual licence fee

Non-linear

Non-linear costs are not incurred in a uniform manner and can be one off or sporadic

  • Repair costs
  • Breakdowns
  • Legal fees

Direct

Direct costs are identifiable costs which are directly associated with a piece of work

  • Purchase of raw materials to make products for sale
  • Wages

Indirect

Indirect costs are not directly associated with a piece of work

  • Utility bills
  • Wages for administration personnel
  • Professional fees

Controllable

Controllable costs are those which you can have influence over the outcome.

  • Advertising
  • Training
  • Wages

Non-Controllable

Those costs over which you may have little no influence

  • Major repairs
  • Fuel
  • Licences

Material

Significant costs in the context of your overall business.

Immaterial

Costs that are insignificant in the overall context of your business

Once the type of costs has been established, it’s important to consider what drives these costs - this is key to being able to better manage and control how your business spends money. Below are some examples of cost drivers:

  • Inflation
  • Market demand for resources (people, equipment, material etc)
  • Contract terms & conditions
  • Operational requirements
  • Lead times (need today vs need tomorrow)
  • Industry norms
  • Legislation

Each business may have unique cost drivers relevant to their industry.

Were you able to relate your business costs to the categories above? Cost management is an area covered in detail in our training course “Finance Basics For Business Owners”. Why not sign up for the next one to learn more? The next edition runs 13 and 14 August at our offices here at 8 Albert Street.

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