Managing your cash flow
As your sales grow, you may find your costs rising, too. Here’s how to understand your cash flow and budget wisely for success.
This content reflects the real-life experiences of individuals. Participants received compensation for sharing their stories. Venmo is not making any recommendations regarding finances. Consider seeking advice from your financial advisor.
Understanding
your costs
Your business’ operational costs can be broken into two distinct categories: fixed expenses and variable expenses.
Fixed expenses
Fixed expenses are costs that remain the same every month, regardless of how many sales you make.Your business’ fixed expenses are likely unique to your industry, but a few common ones include:
- Rent, like rent for a workspace, storage space, or studio
- Loan payments, like car and equipment loans
- Some utilities and services, like your cell phone, internet, or software subscriptions
Variable expenses
Variable expenses are costs that can vary from month to month.Typically, these expenses grow when you make more sales, and shrink when you make fewer sales. Your business’ variable expenses are likely unique to your industry, but a few common ones include:
- Hourly labor
- Production costs, like raw materials
- Packaging and shipping costs
- Maintenance and equipment repairs
- Some utilities, like gas and electricity
Budgeting your expenses
When planning your business’s budget, you’ll need to take both fixed and variable expenses into account.
Fixed expenses are easy to budget for—they are the same every month. When it comes to budgeting for variable expenses, you’ll have to take a look at what you already know about your business’s expenses and output. The more information you have, the easier it will be for you to plan for the future.
Your business’ variable cost per unit can help you identify areas for expansion and opportunity.
An easy way to determine your variable cost per unit is by adding up the number of units you’ve produced over your chosen time period, like the past year, then adding up all your business’s variable expenses for that same timeframe. Your variable cost per unit is the sum of your variable expenses divided by the number of units.
Calculate your
variable cost per unit
Let’s say you sell 100 products a year and spend $1,000 on variable expenses—like labor and raw materials. Your variable cost per unit would then be:
With this information, you’ll
be able to:
- Set a fair sales price for your product
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Once you understand how much it costs you to produce your product, you’ll better understand how much you need to charge in order to turn a profit.
- Identify areas of your budget that impact their bottom line
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Are your materials costing you an arm and a leg? Could you find a more efficient way to create your product at scale, effectively reducing your labor costs?
If you’re able to reduce your
variable cost per unit, it may
help your business:
- Take home more profit at every sale
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Lower production costs will help you improve your profit margin.
- Offer more competitive prices to customers
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In a competitive market, pricing is everything. With a lower variable cost per unit, you may be able to lower your sales price without affecting your bottom line.
Say no to guesstimating
Underestimating is one of the most common mistakes budgeters make, so try to resist the temptation to simply estimate your variable expenses. It pays to be thorough!
One-time expenses count, too
Even if you’ve recently made a payment you feel confident you won’t have to make again (for example, maintenance on a broken piece of machinery), make sure you include all your business expenses in this calculation.
Pay yourself
Determine the number of hours you spend working for your business, and be sure to provide yourself with a livable wage. This will help you ensure that you are pricing your goods correctly and paying yourself fairly.
Making your expenses
work for you
There are a few simple ways your business can improve its net profit, or the amount of money your business has left over after accounting for all of its fixed and variable expenses, including the cost of materials and labor.
Reduce your fixed
expenses
Because these expenses are the same whether a business sells one product or five hundred products that month, it’s important to keep them as low as possible. This might look like finding a cheaper space to rent, for example, or switching utility providers.
Reduce your
variable expenses
Because your variable expenses reflect cost per product, this can be an especially effective tactic if your business has a high sales volume. This might look like reducing the cost of materials, for example, or finding more efficient ways to produce your product.
Sell more products
“Just sell more”—easy, right? But it’s worth mentioning that long as your business’s operating costs do not increase at a faster rate than its revenue, your profit margin will rise. Don’t fret if this doesn’t come right away. As you get into the groove of running your side business, you’ll get there.
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