Our client is a wholesaler. The business had been operating for three years and it was still struggling to make ends meet. The profit was up and down. Cash flow was hard to predict. The business appeared risky and unstable. These problems had been keeping the owner up at night.
After we helped the owner get the financial records in order and itemized differenct expenses, the owner was able to sit down quietly and figure out what went wrong.
Coverting a fixed cost into a variable cost lowered the business risk
We found that the biggest problem was the way the sales people were paid. The business paid the sales people salary, which is fixed. When the sales were high, it is OK. But when the sales were slow, the profit fell dramatically, and so did cash flow. Realizing the problem, the owner decided to change the fixed salary into variable commission based on the percentage of sales. Fortunately, after negotiation, the owner and his sales people came up a pay structure that everybody was happy with. By simply changing a fixed cost to a variable cost, now, the cost is automatically drops when the sales are down. This makes profit and cash flow much more stable. The owner is finally warry free and is able to concentrade on growing the business.
Converting a variable cost into a fix cost increased business profit
Another problem is the warehouse cost. The business were paying substantial amount to a warehousing service company to handle merchandise storage and shipping. The cost is a variable cost based on the volume of sales. This made sense at the early stage when the volume was low. But it was becoming more and more expensive as the sales vulume increased. It appeared that renting a warehouse was cheaper. After carefull calcuation and camparison, the owner decided to rent his own warehouse. Adn the result is very good. Converting the variable warehousing service fee into a fixed rent has increased the business profit.
This case study shows us that conversion between fixed costs and variable costs can sometimes low business risks and increase business profit.
Related topics
Fixed costs and variable costs
