Expenses are a necessary part of operating any business and controlling expenses is critical to keeping your business profitable. To manage your business successfully, you should recognize that not all expenses are created equal. Variable expenses are the “good” expenses since they only increase as your sales and production activity increases.
TL;DR (Too Long; Didn't Read)
Variable costs go up or down according to your production volume. If your business increases the number of items it's selling, then the cost of your raw materials, shipping and packaging will also increase.
Variable Expenses and Examples
Variable expenses coincide directly with production volume and sales. For example, if you sell women's clothing online, there are packaging costs, shipping costs and credit card fees associated with every transaction. If you sell $10,000 worth of product, these expenses might come to $1,000. If you triple your sales to $30,000, your transaction expenses rise to $3,000. Rising variable expenses are typically a good sign because it means you're selling more product.
In a production setting, your raw materials are the most purely variable cost of all. As production increases to meet demand, you'll need more raw materials to manufacture more product. Higher machinery usage also increases costs for oil, maintenance and repairs. Other variable expenses typical of many businesses include packaging, shipping, vehicle fuel, sales commissions, performance bonuses to employees, telephone bills, office supplies, delivery charges, marketing costs and credit card fees. If you pay employees on an as-needed basis or for piece rate labor which is paid to workers for every unit completed, then these expenses will also be a variable expense.
Difference Between Fixed and Variable Expenses
In most businesses, the bulk of all expenses are fixed expenses. This is the overhead you must pay to keep your business running, regardless of your sales volume. Rent, mortgage payment, salaries, insurance payments, loan repayments and utilities are all examples of fixed expenses. These costs are much harder to reduce than variable expenses. To reduce rent, for example, you'd have to move to smaller premises or share your office space. These expenses are more likely to cause financial problems for your business when they are too high.
Controlling Variable Expenses
Variable expenses are driven by activity and usually are a positive factor for your business. However, it's still possible for a variable expense to be greater than necessary. For example, you might have a high rate of product returns that increase your shipping costs. Or, you might have a poor deal from the packaging supplier that keeps you from taking advantage of volume discounts. Examining your variable expenses and finding ways to reduce them is one of the easiest ways to improve your margins and boost your profitability.