Getting the maximum profit possible is the goal of every company, but it is not enough to just sell in large quantities, it is necessary that expenses are minimized. To calculate whether your company is making a profit is simple: profit is the difference in revenue minus the expenses that are basically: costs and expenses.
To obtain maximum profitability, all disbursements of the organization must be properly categorized and subsequently analyzed to understand how your company is using its financial resources. With this it will be possible to implement an effective management of Costs and Expenses.
In this post we will focus on the Expenses theme , explaining the differences between Fixed and Variable Expenses and giving a clear and concise example.
What are expenses?
Before talking about fixed or variable expenses, you need to understand what expenses are.
Expenses and costs are not the same, since the costs are expenses of the product / service and the expenses are the expenses associated with the administration and marketing of these products / services.
Examples of expenses and costs
To better understand this difference, see the examples below:
- expenses: expenses related to the management of the company, which allow its operation, such as marketing and advertising, internet, administrators’ salaries, office supplies and even the coffee that is served to customers and employees;
- costs: expenses related to the production or purchase of goods, such as raw materials, operator salaries, production logistics, depreciation of machinery, packaging, etc.
See also: Expenses, costs and expenses: is it all the same?
Fixed expenses are those that do not change with the sales and distribution of products and / or services. In other words, regardless of monthly sales, expenses classified as fixed will occur anyway.
These expenses can be: expenses with rent, water, electricity and cleaning of the office, administrative salaries, expenses with marketing, office supplies, training of the commercial force, among others.
As these expenses occur periodically, it is important to always have a reserve to cover these expenses. With a safety margin you avoid unforeseen events, as even fixed expenses can vary. In fact, if they start to vary a lot, stay tuned!
In contrast to fixed expenses, variable expenses are those associated with sales and distribution of products and / or services . The greater the volume of sales, the greater the variable expenses. A clear example of this is the sellers’ commission.
Other examples are: freight paid for delivering products to customers, packaging used to sell products, reverse logistics, sales taxes such as ICMS, PIS / COFINS and ISS.
And how to manage variable expenses? This is not such a simple task. Unlike fixed expenses, where there is room for maneuver to reduce expenses, variable expenses are more difficult to handle.
In this case, it will be necessary to renegotiate with the logistics companies trying to minimize distribution prices, reduce packaging expenses and review the sales force compensation plan.
Throughout the article you saw the basic differences between costs and expenses , fixed and variable expenses, as well as how important it is to manage them so that your company remains profitable .
In summary, fixed expenses have nothing to do with sales of products or services. They will happen rain or shine. Variable expenses are directly related to the company’s sales.
In relation to the management of fixed and variable expenses, first eliminate the maximum possible expenses, preventing large indebtedness. Controlling expenses is a strategy that allows you to increase your organization’s profitability.
Determining and correctly managing your company’s expenses and costs provides you with several benefits, such as the Contribution Margin analysis by product. It will tell you whether a product or service is being profitable or not.
In other words, good expense management, in addition to its efficient calculation and classification, allows you to monitor and analyze results and performance indicators, such as EBITDA , profitability and the Contribution Margin itself , according to what you have planned. This will make it easier for you to reach your goals and fix deviations.
We hope you enjoyed our content on fixed and variable expenses and understood the importance of managing it in a company.
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