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How to Keep Fixed Costs Low When Starting a Company

How to Keep Fixed Costs Low When Starting a Company

In every business, cash flow and profits can change, while fixed costs such as debt, mortgages and lease payments remain steady. So even if a company’s cash flow shrinks to the point where its owners have trouble paying bills and salaries, its fixed costs will continue undiminished. In today’s article, Jeffrey Moses shares some ideas that could help minimize financial shortfalls during a cash crunch.

During the dotcom rage, many companies secured wildly extravagant expenditures on everything from office leases to employee perks. Some companies signed leases for annual sums exceeding their annual corporate earnings, since many, of course, weren’t even making a profit. Clearly, this was a potential disaster in the making.

It’s unfortunate that many of these dotcoms, and other old-economy companies caught in today’s economic slowdown, have been forced to cutback their workforce to reduce costs, while continuing to make payments on cavernous, unused office space.

The lesson learned can be applied to any new or growing company: be conservative when taking on fixed expenses. These expenses include business-loan debt payments, mortgages, loan payments for equipment or vehicles and leases for office space or equipment.

How can you minimize such fixed costs? Simply by making a hard, cold analysis of what you really need. When looking at office space for a start-up, many small business owners have trouble resisting the glamour of high-profile buildings and areas within the city, even though these spaces inevitably command a high lease. It would be better in most cases to lease less expensive space in another area, then move up to fancier digs when actual earnings allow.

Another option in today’s market is to negotiate with the owners of an upscale office building so that you carve out such a great lease that you end up paying only a little more than you would by leasing less-desirable space. This may be possible in areas of the country that are experiencing severe office surpluses. Such lease negotiations can be tricky, but you have little to lose beyond the owner rejecting your proposal. If you’re not an expert in real-estate negotiation, hire a broker or accountant to negotiate for you. It could be worth the price.

Fixed costs can also be reduced or avoided when buying or leasing vehicles and equipment. Be conservative. Don’t go for the latest, most expensive models. For instance, do you really need the latest computer? Often, last year’s model will serve your employees’ purposes just as well. And do you need a fleet of new trucks, or will several pre-owned vans do the trick?

Start-up expenses for a business can add up quickly, and almost always exceed projections. Fixed costs, in particular, can make a company vulnerable to even short-term cash crunches. For this reason, you need to be absolutely ruthless when deciding on fixed costs associated with office space, vehicles, equipment, furniture, office decor and other expenses. A new company rarely has to look fancy–it just has to remain in business long enough to begin turning a profit.

by NFIB