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As a startup, variable expenses can be both a blessing and a curse. You may enjoy the flexibility of adapting your production to a monthly slump in sales, or you may feel the strain if you have an unexpected surge in demand that drives up production costs.
Suppose you get an unexpected (but welcomed) mention on social media from a high-volume influencer. You may find your variable expenses ballooning from increased demand. From hiring new team members to outsourcing work, your startup costs can quickly add up and blow your budget.
Because variable costs are more difficult to predict, startups face a unique challenge regarding budgeting. With little history or data, it can be hard to accurately estimate how much you'll need to spend on these expenses.
The key to managing your variable expenses is to monitor them closely. Keep your budget goals in mind and adjust your spending accordingly. This will help you stay on track and avoid major budgeting pitfalls. Startups can also use technology to streamline the process.
Let's look at what variable expenses are, common types of variable expenses for startups, and how to calculate them so you can be better prepared to manage them.
What are variable expenses?
Variable expenses, also known as variable costs, change depending on your company's production or sales volume. They can vary monthly as your business grows or faces challenges. You'll be better prepared for surprises if you know what costs can ebb and flow.
Common examples of variable expenses for startups
The most common variable expenses for startups fall into the following categories:
- Cost of goods sold (COGS) is the costs associated with the products or services you produce and sell. This includes raw materials, labor costs, factory overhead, etc.
- Customer acquisition costs like marketing and advertising can vary greatly depending on your strategy and budget.
- Research and development costs may also vary depending on the scope of your projects.
- Travel and events can be costly for startups that need to attend industry conferences or send employees on business trips.
- Office supplies fluctuate as you grow but typically include pens, paper, stationery, printer ink, and furniture.
- You'll pay sales commissions to any salespeople or third-party organizations you hire. These numbers will vary depending on how much you're selling.
How to calculate variable expenses
Understanding your variable expenses is essential for budgeting and forecasting. Here are some of the critical calculations associated with variable costs:
Total variable expenses
Your total variable expenses are the product of all your variable costs. You can calculate this by multiplying your cost per unit by the total number of units.
(variable expenses = cost per unit x total units)
Other important calculations associated with variable expenses
Some additional calculations associated with variable expenses include:
- Contribution margin: This calculation shows you the revenue generated from each sale after subtracting the variable costs for that item. Your contribution margin and break-even point can help you set better pricing for your products or services.
- Gross margin, profit margin, and net income: These calculations are essential for understanding your business's profitability. They also show you how much of your revenue remains after subtracting variable costs.
- Pricing: Understanding how much it costs to produce a product or service can help you set competitive yet profitable prices.
Variable vs fixed expenses
Variable expenses differ from fixed expenses, which remain the same each month regardless of sales volume. Fixed expenses include rent, insurance, utilities, and payroll for jobs unrelated to production. The key to budgeting for variable expenses is understanding what they are so you can manage them effectively.
Variable expense vs. average variable expense
It's also important to know the difference between a variable expense and an average variable expense. A variable expense is a cost that changes based on your company's production or sales volume. In contrast, an average variable expense is the average cost of all your variable expenses over time.
Knowing the difference between these two can help you keep more accurate records and better forecast future costs. Predicting and managing expenses is essential for any startup founder looking to maximize profits.
How to budget for and minimize variable expenses as a startup
Startups often have limited resources, and it's important to use them wisely. Here are some tips for budgeting for and minimizing variable expenses as a startup:
- Calculate your average expenses – Calculate your average variable expenses to understand how much you should budget each month. Your average expenses may include materials, labor, travel, or marketing costs.
- Establish limits and stick to them – Limits can help you stay within budget, so establish these for both the short-term and long-term. For example, you may set limits on monthly marketing costs to ensure you don't overspend or annual limits on salaries.
- Be sure to add room for unexpected costs– Even with limits, you should always expect the unexpected. Make sure you budget some extra money for last-minute costs or changes in production.
- Compare profit and loss statements to your budget – Make sure to make this comparison regularly to help you identify discrepancies and adjust expenses accordingly.
- Evaluate variable expenses annually – Evaluating your variable expenses annually can help you identify and eliminate any unnecessary costs. By understanding your variable expenses and making smart budgeting decisions, you can minimize the impact of unexpected costs on your company's finances.
- Invest in technology to streamline and automate processes – As your business grows, it can become difficult to stay on top of variable expenses. Investing in technology to automate and streamline processes can help you reduce costs and manage your finances more efficiently.
- Take advantage of free or low-cost marketing and advertising channels – Marketing and advertising are essential for any business, but they can be expensive. Take advantage of free or low-cost channels such as social media or content marketing to help you reach your target audience without breaking the bank.
Why do i need to monitor variable expenses so closely?
Startups fail because of a lack of cash or resources. Variable expenses can challenge startups, even when founders budget carefully. Fast-paced, ever-changing markets can mean unexpected costs and additional costs. Monitoring variable expenses closely helps you stay on top of your budget, identify trends, and make adjustments to ensure your business is efficient and profitable.
You can better predict future costs and plan for production or sales volume changes by tracking variable expenses over time. You can use this information to adjust pricing, negotiate better deals with suppliers, or cut out unnecessary costs. Knowing how much it costs to produce a product or service is essential for setting competitive prices to help your business succeed.
You can make a big difference in your bottom line by tracking variable expenses and taking action when you see a drastic change. With the right strategies and monitoring tools, your startup can stay on top of its budget and increase profitability.
Making variable expenses work for you
Understanding the importance of managing variable expenses will help you prepare for the unexpected costs of building a business. You will create a more financially secure and successful venture by calculating and predicting variable expenses, monitoring them closely, and taking action on insights gained.
To minimize variable expenses and maximize profitability, remember the following:
- Prioritize spending and stick to your budget
- Compare profits and losses against your budgets
- Focus on efficiency, not just cost
- Create a solid financial management plan
Financial management is an essential skill for startups, and learning how to manage variable expenses can help your business stay on track and succeed. With the help of finance experts, you can create a budget, predict future costs, and develop strategies for minimizing variable expenses.
