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Cutting Fixed Costs

Provided by SME Solutions Center - Kenya


Minimising Fixed Expenses

Your supplier is unlikely to offer you discounts unless you purchase in bulk or pay up promptly. Consequently, you are better able to reduce your fixed, as opposed to variable costs. Such expense reduction will lower your total fixed costs. You will thus spend less. Some examples of fixed cost items you could consider reducing include:

  • Rent
  • Wages
  • Insurance
  • Travel
  • Legal
    • Accounting
    • Utilities  

Rent

To reduce the monies you pay for rent, you need to properly plan and strategize for your lease. Such planning will see you making a wise choice regarding whether to go for a short-term or long-term lease arrangement.  To arrive at an appropriate decision, you need to make projections about two main possibilities. You need to forecast the future situation of:

  • The commercial premise rent market
  • Your business’ performance  

Long-Term Lease 

You would choose a long-term lease agreement under certain circumstances, namely:  

  • If the rent amount you pay is low
  • If the value of commercial business premises is on an upward trend

Short-Term Lease

A short-term lease arrangement will suit you in certain situations. Usually, the reasoning behind the short-term arrangement is that you would soon opt out of the deal and seek a fairer, better one.  You would opt for a short-term lease arrangement if:

  • Similar business premises charge less rent amounts
  • Commercial business premise values are on a downward trajectory  

Rent Reduction Strategy

Under certain circumstances, you could hold negotiations with your landlord with the aim of securing lower lease rates.  Some situations in which you could hold such talks include: 

  • When your current lease term is nearing expiry
  • When you are experiencing serious financial problems
  • When comparable commercial property lease rates have gone down 

Current Lease near Expiry

Towards the end of your present lease period, you could point out that you have been paying excess lease amounts. You could then ask the landlord to give you a better deal or risk losing you to fairer competitors.    

Falling Commercial Property Lease Rates

If your investigations reveal that similar premises are charging lower leased rates, you could ask the landlord to reciprocate by lowering your lease amounts. In this case, the landlord is likely to hear you out for fear of having you move to a better-priced property.  

While Experiencing Severe Financial Crises   

When you are hit by monetary problems, you can hold talks with your landlord. Explain your situation and your relocation plans under the present terms. Ask the landlord to offer you a better deal if you are to remain.  

Insurance

To minimise insurance costs, scout for a suitable insurance professional. An independent broker or agent is the best choice. To get a good agent, consult with peers within your field. This insurance professional will offer you important services, such as:  

  • Helping out with filing of claims
  • Periodically updating you with quotes from various insurance firms
  • Occasionally updating you about new policies

Premium Reduction Strategies

You could minimise your premiums amounts by taking certain measures. You could:

  • Determine if your client’s cover will indemnify your business
  • Institute risk management programs
  • Avoid duplicating coverage
  • Determine whether your client’s cover insures your business  
  • Seek group cover packages
  • Prioritise your biggest risks

In certain business instances, clients insure themselves. In such a case, your insurance premiums are reduced.  

Minimising Risks

By reducing business risks, you reduce your premiums and also bring down your indemnity claims. Most insurance firms offer discounts or lower premiums for clients who institute safety precautions.  Some steps you could take to reduce risks include:

  • Investigating and removing risky workers like drunkards  
  • Installing safety features such as safety systems or smoke detectors

Looking Out for Group Insurance Packages

Seek for the rates offered by insurance firms for members of any business organisation you belong to.

Avoiding Purchasing Duplicate Cover

Be careful while examining your policy’s fine print. Seek for cheaper coverage packages that incorporate more covered items. An inexpensive cover could cover your business as well as the few equipment therein.   

Prioritising Your Major Risks

Review your business and establish the catastrophe than could totally bring down your business. Buy an insurance package that comprehensively covers this risk.     

With some strategizing and forethought, you could bring down some of your fixed costs. Common examples of fixed costs include insurance premiums, wages, and leases. This is because, unlike variable costs, these constant monthly bills can be easily modified. With insurance, you would do well to carefully source for an insurance professional. This person will offer you accurate advice on the policies to take considering your needs and the prices. Independent brokers would objectively offer you this kind of counsel. Further, you would benefit if you meticulously selected the business premise to lease. Depending on the preferred lease period, you will make prudent financial decisions if you carefully evaluate the available options. Proper management of the options at your disposal could go a long way in enabling your small business to survive amid financial turmoil. Eventually, your total fixed costs will come down.

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