Advice:10 reasons why it’s smart to manage your costs

By , published on 18th October 2010

Everyone focuses on winning sales and growing turnover. But often the biggest opportunity to boost profit is by reducing your costs. As Jass found in Chapter 7 of my new Checklists book (Mokoko cocktail bar), you can reduce cost without reducing perceived quality. Here are 10 reasons why you might choose to do the same:

  1. Profit – Quite simply, the lower your costs the higher your profits;
  2. Scale – The more profitable your business the easier it will be to manage. You’re making more money from less activity;
  3. Risk – The more you sell the more you’re exposed to bad debt. Better to make your profit on lower sales;
  4. Quality – remember that buying better doesn’t always mean spending less. You want reliability, durability and consistency if you’re to avoid customer complaints;
  5. Buying’s important – It sounds silly, but we all overlook how important buying is. If your sales are £100,000 and your profit and pay total £40,000, you’re actually spending £60,000. More than any one customer spends with you!
  6. Staff count – In most businesses, staff form the largest cost. Employing people is expensive. See Chapters 15 & 16 for top people tips;
  7. You borrow less – if you spend less, you need less working capital. Remember that money costs you too – it’s called interest!
  8. Every little counts – it’s easy to let your costs run away with you, especially the small things like subscriptions and gadgets. Little costs together make big costs!
  9. Space – If you carry a lot of stock you need more space. It sounds obvious but buying stuff as you need it might mean you can do away with storage space altogether;
  10. Save energy – For most of us, energy and fuel costs are an increasing burden. Don’t overlook them.

Adding value through what you buy

It is important to manage costs. But sometimes, what you buy is more important than what you pay for it. People will often pay a premium for products and services that contain branded components that are themselves considered premium brands. Examples include:

  • Intel inside – people will pay more for a PC with an Intel chip. They believe (from Intel’s own marketing) that the chip will perform better than cheaper rivals;
  • Smart – a Smart car might cost more to buy than other similar sized models, but people on holiday will pay a premium to hire a car they think will be more fun;
  • MBA – A consultancy will pay staff with MBAs higher salaries. They will also be able to charge them out at higher day rates.

Funchal Car Hire, Madeira

Madeira is popular with middle aged, well off Northern European tourists. The weather is good all year round and you’re unlikely to get mugged or an upset tummy.

If you’d visited in August 2010 and decided to hire a car for one week, this is what it would have cost you:

Fiat Panda – £168
Smart Pulse – £223

Few hire companies have Smart cars on Madeira and tourists like them. Funchal Car Hire can charge a premium price and know that the cars will always be booked. The Fiat Panda on the other hand, is simply ‘another small car’ and its low rental cost reflects the fact that this is a commodity product, often hired on arrival in the airport arrivals lounge.

What is interesting is that the easier to rent car, that costs more, actually pays for itself sooner than the cheaper Fiat.

Car Rental Cost New Weeks hire to cover purchase price
Fiat Panda £168 £7,600 45
Smart Pulse £223 £8,800 39

You can see straight away that the Smart car is more profitable for the hire company.

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Robert Ashton

About Robert Ashton

Robert Ashton is an entrepreneur, campaigner and business author with three business books in the top 10 recommended for business on Amazon. He knows how enterprise can liberate, empower and strengthen people and communities. Robert is always focused on the end goal but treads lightly as he goes – that’s why he’s called the barefoot entrepreneur.

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