How to Increase your Revenue without Increasing your Fixed Costs

How to increase revenue without increasing your fixed costs

For increased profitability, you can do one of two things; you can reduce your costs without it negatively affecting your revenue, or you can increase your revenue while not increasing any costs. Easier said than done; in particular where increasing revenues can mean unavoidably increasing costs in some way. It’s inevitable that increasing sales means rising costs – the trick is to not increase your fixed costs.

What are fixed costs?

Fixed costs are those costs which cannot be changed in the short term – you’re committed to paying for some items whether you use them or not, and often for long periods of time. For example, if you have leased premises, you will be tied in at a fixed price for a specific period of time. This could be at least a year, possibly decades or more! You will be obligated to meet the conditions of payments whether you’re open, on holiday, or even trading. You can’t do much about these sorts of costs in the short term.

If you want to increase your revenue, it could be a straightforward matter of increasing your sales volumes. What you want to try to do is increase your output without adding to your long-term fixed cost commitments. Short term costs are ok and probably inevitable, but you should avoid over-committing yourself financially until you’re in a position to invest in expanding.

What are fixed costs

Assess your capacity

First of all, you need to find extra capacity that exists right now. Do you have a machine that is idle for some of the day? Do you have a member of staff who spends some of their working time twiddling their thumbs? The best way to do this is to do a capacity audit. If you’ve never done one before or don’t know where to start – this article is a good read

You need to identify where you have gaps that can be filled by extra work without the need to invest in extra equipment. The key to doing this is to know your staff and machinery inside out. You will have some staff which are able to work at a higher rate than others, and staff who wouldn’t cope even with a slight increase in workload. There may also be a good technical reason why a certain machine only runs for a few hours a day rather than around the clock. You won’t know unless you ask those in charge.

Once you’ve identified where you have the capacity to take on extra work using your existing set-up, then you can have a think about the sort of work you’d like to attract to fill the gaps.

How to find capacity in your business

Identify marginal costs

Once you have found opportunities within your current set-up you need to work out the sort of work that would ideally fill those gaps, and have a think about what you will need to buy in to make this work happen.

You may need to buy in extra labour, such as giving overtime to your existing staff or maybe getting in a couple of agency staff. These are not the sort of costs you need to worry about; as long as their cost is less than the sale price of the products they’re involved with, then you should be fine. This cost will only be temporary as long as the extra work is there to be done and sold.

It will be inevitable that material/inventory costs will rise once your productivity increases. Unless you’re producing the extra work from waste products or spare materials, this is unavoidable. Again, as long as your sale price covers the materials involved, then all is good. You may even be able to wangle a discount for buying increased quantities!

Other costs which could rise with an increase in output are energy, transport, and taxes. As per your usual policies, you need to include these when pricing your products for sale. However, these categories of costs usually increase in line with output quantities and generally drop back once output returns back to normal levels.

Sell, sell, sell

Once you know what type of work you want, and how you’re going to cover the marginal costs of producing the work, then you need to find someone to place an order and buy it.

Get your sales staff on board. They need to know the type of work you’re looking for and that they are authorised to negotiate much harder to get it. You could offer an extra incentive to your sales staff for a particular type of work – you really need to encourage your sales team to bring in the right sort of work that will fill gaps, rather than more work which will mean you have to spend more capital expenditure

Making your sales and marketing teams aware of the type of work you need to be bringing in and why can help them be more focused and encourage them to target their efforts where they will reap the most reward.

Salespeople

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Increasing your profits

Increasing your profits is the ultimate aim of any cost-reduction programme, or a sales push. More work, and more clients isn’t always beneficial to your company’s bottom line, but the right sort of work can be! Choose your clients and the work you take on carefully – if you can increase your profits without having to commit your company to more expense, then you’re doing it right.

To speak to us about our cost reduction services, call us now on 0113 316 7777 or complete our contact form at http://www.marpat.co.uk/contact/

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