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Are You Making the Right Costs Decisions as a Business Owner?

By | 2018-06-17T05:19:33+00:00 June 17th, 2018|Tags: , |

The world of business is rapidly changing! Outsourcing which used to be only for a few special projects is now becoming a common part of most business processes. This changes the way a business owner looks at costs they have to incur in the operation of their business. Take for instance the world of online business: people are making hundreds of thousands from the comfort of their home. Just ten years ago, what is happening today seemed impossible. Making this kind of money without incurring the high expenses associated with a business was a laughable concept.

It is time to think differently.

Thinking to grow your business the way grand ma did is not going to cut it anymore.

There are two broad categories of costs I will like you to consider when choosing your cost structure namely:

  1. Committed costs
  2. Discretionary costs

Committed Costs

Committed costs are costs an organization commits to for an extended period of time. It usually requires a contract and there are usually consequences for breaking the terms of the contract. An example is a 2 year phone contract.


Discretionary Costs

Discretionary costs are money wilfully assigned to a purpose. An example will be supplies bought in your business. It is important to note here that a discretionary cost does not mean costs you do not need in your business but rather it means costs that is more flexible in nature and can change as your business changes.

 

The rapid change in the business world is changing the structure of what can be called committed versus discretionary costs. It used to be labor used to be a committed costs but now with outsourcing it is becoming more discretionary. Most business costs are also moving in the same direction: That is from committed to more discretionary in nature. A good example is the cellular phone: most phone companies are beginning to realize in order to survive in the long run they have to get away from only offering long term contracts and giving people an option to only pay for services they need when they need it.

Discretionary costs allows for flexibility. That is you are able to change as the market changes. When your circumstances change, you will need the flexibility to change your cost structure to reflect the changes in the environment. Today it is possible to be more nimble in handling your business costs and taking on more than you should is never advisable.

Starting your business with discretionary costs

You have heard the term it makes money to make money. On the other hand, I think it takes wisdom to make money. There are lots of people out there that have taken very little money and turned it into a fortune by being disciplined. People who often say it takes money to earn money have not given much thought to how money can be made with very little resources. The costs of starting an online business are very negligent in nature. If you are willing to put time into growing your followers, you do not need a lot of financial resources.

The problem with people who unsuccessfully start businesses is that they start asking the wrong questions. Take a look below at 3 common questions asked and what should be asked in its place:

Wrong questions

Right Questions

How can I afford the “committed costs” needed to start this business (Committed costs could be machinery, rent, etc.)? What are the minimum resources I need to effectively serve my customers?
How much do I expect to spend in my first month or year of starting this business? How many units am I likely to sell and how do I directly link my profits to my costs per unit so I am not coming out of my pocket?
How much do I need in my marketing budget? How do I engage my audience so I can influence them to patronize me?

 

The wrong questions have one thing in common, they all deal with committed costs and the right questions are more discretionary in nature. It is difficult to stop thinking like grandmother; especially since things are still evolving. But, the idea that you need to have committed expenses to start a business is becoming ludicrous in today’s society. This is especially true in the labor market which used to be a business’s biggest committed costs. Websites like freelancer.com, elance, odesk make it easy to get what you need when you need it and only pay for what you use. Even seasoned companies are beginning to realize the change in the external environment and are structuring their labor force to become more flexible. Having more discretionary costs makes you nimble.

Cost Analysis

So now we know the difference between discretionary and committed costs, there is one more thing we need to do to stay nimble. At least on a quarterly basis analyze your costs to see if you are being efficient in the way you are running your business. It might be you have subscribed to services you are no longer using and will need to cancel.

Always, ask yourself how the costs you currently have add value to your customers.

The end result is you want to enrich your customer’s lives and the cost you incur should reflect this. If your costs are discretionary in nature then getting rid of non-value added costs will not be very difficult.

Non value added costs should not only be thought about in terms of money spent but also time spent on activities. The customer should always be in mind when adding or subtracting activities which consume time in your business. Your goal as the business owner is to continuously add value to the life of your customers. This process of continuously adding value is always on-going and the moment it stops, the business begins to die.

So do you have a business? How do you as a business owner determine what costs go into your business? Are your costs necessary? Do you add value to the lives of your customers?

 

Leave a comment below, I will love to help you make right costs decisions in your business.


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