Want to Achieve A Leaner Fixed-Cost Model ? Here’s How
Not long after the lockdown measures set in did it become apparent that the aftermath of the decline in economic activities induced by the restriction would usher many businesses into uncharted waters. As events unfold, we have seen that navigating through these unusual times is just as challenging for large corporations as it is for MSMEs and start-ups. "The fear is real. When you hear of how big companies you do not expect to struggle are folding up or exiting the country, you want to do all it takes for your business to survive," declared Tofunmi, a restaurant owner. Then, if you consider the uncertainty of the long-term economic impact of the global crisis, having your fixed-cost as lean as possible is mission-critical for maintaining a dynamic, resilient, and sustainable business model.
In many ways, times of great adversities come along with an equal measure of opportunities. One of the benefits they afford you is gaining a greater understanding as a result of the interrogation of your business model and your current financial structure. Hence, it is crucial to state that a lean fixed-cost structure builds flexibility, allowing a business entity to expand during prosperous times, and easily contract to cope with financial stress or crisis. The big idea here is that keeping fixed-cost as lean as possible creates reserves that afford a business more time to rejig its model, change focus, and align its team and capabilities accordingly.
Fundamentally, keeping a lean fixed-cost structure entails shedding those weights that starve the business of the speed and agility required to survive in critical times but does not necessarily mean reducing overall expenses, unless it is a requirement at the time. Primarily, it involves the shifting of fixed costs into variable costs. In this article, we will share a few ideas to assist your organization to attain a leaner fixed-cost structure.
Shrink Your Fixed-Cost Base
Typically, fixed-cost tend to include the administrative, marketing, labour, and other costs that an organization incurs regardless of their current levels of sales or activity. Presently, many businesses plagued with bleeding balance sheets, or those that are poised to avoid such scenarios, have already begun to cut down on their fixed costs to create reserves that will reduce the impact of the paucity of revenues. Often, this manifests as staff retrenchment, slashing marketing budgets, and axing salaries by a certain percentage.
That said, a salient point to keep in mind is that fixed-costs are critical for business existence, even in a challenging financial territory. That’s because, without them, a business entity will not be able to function as well as it should. Therefore, shrinking it too quickly or overdoing it can lead to unintended consequences like creating unmanageable disruptions that undermine the functional capabilities of the organization and ultimately preventing them from strategically moving forward.
To achieve a slimmer fixed-cost structure that is sustainable for your business in the long run, we advise that you move beyond cherry-picking the low hanging fruits. Instead, critically examine your business model and financial structure to gain a good understanding of what is essential, what you can and should outsource, and what you should retain. In light of current realities, we offer the following suggestions:
- Generally, one of the radical changes to work-life that have been championed by the global crisis is the applicability and potential of working from home. Yes, this may vary from one business to another; but leveraging this trend will help you realize a leaner fixed-cost structure. Letting as many of your employees as possible to work from home can help you trim down your physical locations over time, thereby cutting back on overhead expenses like rents. Also, consider what this move will save you on business running costs like the funds spent on internet services and power. When approached strategically, you’ll be freeing up funds for more essential business needs.
- In a previous article, we stated that the reality of working from home is expediting the adoption of technologies and outsourcing of business processes like invoicing, bookkeeping, procurement, and payroll administration [hyperlink COVID 19: A New Incentive To Embrace Digital Changes And Adopt New Models…] This does not only save the amount of time and money squandered when handling these processes in-house, but it also offers the flexibility required to thrive in an unstable climate.
A recent finding by McKinsey reveals that slimmer cost structures could lower breakeven levels (revenues required to cover fixed costs) by 30 percentage points, which would make an enterprise more resilient to demand shocks in the market.
Shift Fixed to Variable Costs
It is not news that the pandemic has affected the lives and livelihood of lots of people. Its import is that the desire to protect jobs and sustain livelihoods can also make taking swift and drastic cuts even intricate for business leaders. Then, there exist the possibility of executives overdosing on too much optimism that things will improve and then stay action until it becomes too late. This is a classic case of the maxim, “uneasy lies the head that wears the crown.”
Keeping a lean fixed-cost structure entails shifting as many fixed costs as possible to variable costs; examining your business model and financial structure would reveal items that you can convert from fixed to variable costs. For example, instead of employing people to fill all the roles in your organization, you can consider recruiting full-time into critical roles and shift towards contracting freelancers or using volunteers to do your work.
A better option is to temporarily recruit for all or some of your business functions for the specific period that they will be required. In recent times, some clients that have used our temporary staff services have reported significantly reduced fixed-costs due to the elimination of the challenges and associated cost of recruiting, training, managing, retaining, and manpower planning. Besides, they also speak highly of the added benefit of having a structured yet flexible workforce that affords management the required focus for strategic business issues. Also, this takes away the exposures to employment-related statutory and regulatory risks for some or all your job functions.
Similarly, it is necessary to shift towards allocating capital, human, and other resources towards value-creating rather than value-consuming aspects of your business. To do this effectively, consider reshaping and rejigging current business portfolios for substantial value creation by prioritizing knowledge and innovation-led business with minimal capital requirements.
While the points contained in this article may not be exhaustive, we hope that they will be the little seeds that will help you develop a leaner fixed-cost model to help your business adapt to the current climate and continue to move forward.