| > | | | | indemnity premiums, capital costs of fixed assets, |
| Small business often accepts business expenses | | | | administrative, legal and professional fees. Another |
| as inevitable and while some effort is usually | | | | way to view what is and what is not a fixed cost |
| made to keep expenses down it is often done | | | | is to determine which costs are incurred to |
| without reference to the accounts. Maintaining a | | | | provide the base operating facility of the business. |
| regular system of bookkeeping using suitable | | | | If by changing the base of the business or |
| accounting software can assist the cost | | | | negotiating better rates for those base expenses |
| accounting for profit exercise by providing the | | | | the fixed costs can be lowered then the pressure |
| source and extent of the actions to be taken. | | | | on generating gross profit is reduced. Fixed |
| Cost accounting is a complex subject that | | | | expenses may also contain such waste |
| specialist accountants use to examine and report | | | | expenditure and any non essential expenditure in |
| on business expenses to ensure financial control. | | | | this area should be reviewed for potential |
| Such expert cost accounting might involve | | | | elimination on the basis that if it can be dispensed |
| absorption costing, marginal costing, break even | | | | with without affecting sales volume then chop out |
| and variance analysis. Such specialist accounting | | | | that expense as waste. |
| techniques are not usually available to the small | | | | Variable costs depend heavily on the products or |
| business as they lack a cost accountant. | | | | services being provided but are essential the cost |
| The good news for small business is that the | | | | of goods and services being sold. Often called |
| majority do not need such specialist costing | | | | direct costs the variable costs of a business |
| analysis as then proprietor usually has intimate | | | | should be reviewed for ways to reduce the unit |
| detailed knowledge of all business expenses | | | | cost either by sourcing cheaper supplies at the |
| incurred. Or at least the small business believes he | | | | same quality levels or negotiating more effective |
| has that knowledge. | | | | prices. The volume of purchases can obviously |
| In truth it is not until regular bookkeeping records | | | | affect the variable cost and consideration may be |
| are produced that the small business can stand | | | | given to placing regular orders, higher volume |
| back and examine the real effect of the business | | | | orders or negotiating settlement discounts. |
| expenses on the profitability of the business. And | | | | Direct costs are perhaps one of the one most |
| by virtually taking a third party view of the costs | | | | influential cost areas in that the lower the direct |
| and effect of those expenses on profitability can | | | | cost that can be achieved reduces the sales |
| the financial decision be taken to improve | | | | volume required to reach and exceed the beak |
| profitability. | | | | even point and also puts less pressure on the |
| Producing accounts on a monthly basis using | | | | fixed costs. |
| accounting software suitable for the size and | | | | Semi variable expenses would be those items |
| accounting experience of the small business | | | | which the small business makes definite decisions |
| owner is the first step to improving profitability. | | | | to buy depending upon the requirements of the |
| The second step is to review those accounts and | | | | products and the level of volume required. Many |
| determine just which cost items can be changed. | | | | semi variable costs are dependent upon the |
| Costs occur and behave in different ways. Some | | | | management decisions of the small business |
| business expenses may be regarded as fixed | | | | owner and are a critical area in which the success |
| costs which others are termed variable or semi | | | | or failure of the business may depend. |
| variable costs. The impact of sales volume | | | | Semi variable costs may include the advertising |
| increases or decreases variable costs and the | | | | and promotion costs of the business, perhaps the |
| marginal gross profit produced while turnover has | | | | transport and distribution costs, direct employees |
| little impact on fixed costs in the short and | | | | and goods or services bought in to support the |
| medium timescales. | | | | sales volume. |
| Having produced a monthly profit and loss | | | | Each variable cost should be reviewed and a |
| account and started the accounting for profit | | | | decision made on whether value for money is |
| review of the financial figures it is useful to | | | | being obtained. That review should also examine |
| separate the nature of the expenses into those | | | | whether the level of support the semi variable |
| that are fixed and those expenses which are | | | | costs provide to the achievement of financial |
| variable costs and those expenses which are semi | | | | success is adequate, improvable or could be |
| variable costs. | | | | dispensed with. |
| Fixed costs means the level of expenditure does | | | | Accounting for profit is the key area in which to |
| not vary with normal changes in sales volume in | | | | examine all costs. Accounting or bookkeeping |
| the short and medium term at least. But being | | | | software can be a useful tool to identify the |
| fixed does not mean the rice of that expense | | | | volume and levels of expense. The nature and |
| cannot be reduced by examining both the value | | | | performance of each expenditure classification |
| for money obtained and whether that cost is | | | | should be subjected to the critical review of the |
| necessary in the first place. | | | | small business owner to generate either a higher |
| Fixed costs of a small business might include such | | | | or safer financial performance. |
| items as rent and premises costs, insurance and | | | | |