FIXED AND VARIABLE COSTS IN A NEW COMPANY

Accelerate your business with these expert tips "Fixed and variable costs in a start-up". Analyse and discover this TIP!

Fixed and variable costs sThere are two types of costs that are used to classify a company's expenses. The fixed costs are those who remain constant regardless of how many products or services the company produces or sellswhile, on the other hand, the variable costs change proportionally to the quantity produced or sold.

For example, rents, employee salaries and utility costs are fixed costs, as the company will have to pay them regardless of the amount of products it produces or sells. On the other hand, material costs, shipping costs and sales commissions are variable expenses, as they will increase or decrease proportionally to the amount of products the company produces or sells.

It is important for companies to consider both fixed and variable costs in their financial planning, as fixed costs are essential for the long-term operation of the company, while variable costs can help maximise profits in the short term.

HOW CAN I NEGOTIATE WITH A SUPPLIER TO CONVERT A FIXED COST INTO A VARIABLE COST?

Negotiating with a supplier to convert a fixed cost into a variable cost may require some skill and strategy.

Some possible ways of approaching this negotiation are:

• Explain the situation: Communicate to the supplier your business situation and how a variable expense would give you greater financial flexibility. It is important to show how the change would benefit both the supplier and you.
• Offer an increase in purchase volume: If you can demonstrate to the supplier that you can buy more products or services in the future, they may be willing to change the terms of the contract.
• Propose a pay-as-you-go scheme: If it is a fixed expense related to a tool or equipment, you can propose a pay-as-you-go arrangement instead of a fixed monthly payment.
• Search for other suppliers: If the current provider is not willing to change the terms of the contract, you may want to look for other providers that offer a variable tariff.

In general, the key is to be honest and transparent with the supplier, and to present a proposal that benefits both parties. Negotiation can take time and may not always be successful, but trying to convert fixed costs into variable costs can be an effective way to better manage your business costs.

DIFFERENCE BETWEEN TYPES OF COSTS

AFTER IDENTIFYING ALL ITEMS AND HAVING AN APPROXIMATION OF A SUPPLIER:

• Differentiate between Fixed or Variable costs (resources that I use in less than a year, every month...) and investments (resources that I need for more than a year). 
• Fixed costs (which do not change during a month).
• Variable (varying with sales).
• Investments (last more than one year).
• Difference between fixed cost in the month, variable cost depending on sales.
• There is a fourth way of paying for a resource, which is by handing over part of our capital, i.e. by making you a partner, I pay with my company's capital, media for equity (I provide capital in exchange for advertising), services for equity, tech for equity, sales for equityBeware of falling into the error of thinking that by giving capital you have the resource forever!!!!

I want you to learn to play by passing each game from one concept: FIXED (F); VARIABLE (V); INVESTMENT (I); PARTNER (S).

Once you have understood the difference I invite you to reflect on each item you have identified how you can negotiate with the supplier the same output with different V, F or I concepts. Each output of money is F, V, I or S depending on how we negotiate it with each supplier. In other words, costs are not F or V or I by themselves, by their own nature, they are whatever I want them to be.

EACH SUPPLIER TENDS TO HAVE A COMMON FORM (F, V, I...) THAT WE ARE NOT USUALLY INTERESTED IN AND THEREFORE YOU HAVE TO LEARN HOW TO NEGOTIATE:

Ex: In a fast-flowing river, if you don't paddle, you go straight to the rocks. 

• It is the same for the entrepreneur: if he does not negotiate with suppliers, it is very likely that he will not get what is best for him. 

Play with each money OUTPUT identified by inviting them to make the right pitch to change strategy: fixed, variable, investment or partner... Use creativity.

PRACTICE WITH THESE EXAMPLES

• SOFTWARE DEVELOPMENT:

  • INVESTMENT payment by total closed budget.
  • FIXED EXPENDITURE I pay the same amount per month.
  • VARIABLE EXPENDITURE I pay a % of the sales achieved.   
  • PARTNER gives % of capital in exchange for development (equity for service).

• MARKETING AND ADVERTISING:

  • INVESTMENT payment by total closed budget.
  • FIXED EXPENDITURE I pay the same amount per month to a marketing company.
  • VARIABLE EXPENDITURE I pay a % of the sales achieved.
  • PARTNER gives % of capital in exchange for development (sales for service).

• PREMISES / OFFICE:

  • INVESTMENT I buy the premises.
  • FIXED EXPENDITURE I pay monthly rent.
  • VARIABLE EXPENDITURE I pay a % of the sales achieved (example AENA).
  • PARTNER I cede % of the capital in exchange for the contribution of the premises to the capital, i.e. I give shares to the owner.

• STAFF:

  • INVESTMENT In the old days you used to buy a slave on the market. This is obviously no longer possible.
  • FIXED EXPENDITURE I pay one salary per month.
  • VARIABLE EXPENDITURE payment in salary of % of sales achieved.
  • PARTNER assigns % of the capital in exchange for its shareholding as a partner.

How can the artificial intelligence (see+ TIP) how to determine the costs of a new company? 

Artificial intelligence can help you determine the costs of a new business through a series of questions and answers. First, artificial intelligence can ask you about the type of business you plan to start and the products or services you plan to offer. From there, artificial intelligence can help you identify the different types of costs you should consider when starting your business.

For example, artificial intelligence can help you identify fixed costs, such as rent, electricity, salaries and insurance, as well as variable costs, such as materials, advertising and marketing expenses and other costs that may change depending on market demand. It can also help you determine production costs, such as the cost of raw materials, labour costs and other costs related to manufacturing.

In addition, artificial intelligence can help you analyse selling costs, such as distribution costs and the cost of selling your products or services in different markets. It can also help you understand research and development costs if you are working on an innovative product or service.

In short, artificial intelligence can help you determine the costs of a new business through questions and answers that will allow you to identify the different types of costs you need to consider when starting your business. This will help you plan your expenses and make informed decisions on how to operate your business profitably.

FOR EXAMPLE, IF YOU ARE THINKING OF LAUNCHING AN ONLINE SHOP FOR ORGANIC PRODUCTS, THE COSTS YOU WOULD NEED TO CONSIDER MAY INCLUDE:

1. Fixed costs: rent of the premises, utilities (water, electricity, gas), salaries, marketing costs, insurance costs, internet and telephone costs, online sales platform costs, website and domain costs.
2. Variable costs: material costs, shipping costs, packaging costs, marketing costs, commission costs for sales through the platform.

To determine the selling price of your products, you would have to consider these costs and add a margin to make a profit. For example, if the cost of a product is $10 and your monthly fixed costs are $3,000, you would need to sell at least 300 products per month just to cover the fixed costs.

It is also important to keep in mind that costs may vary depending on the size of your business and the stage of development you are in. For example, if you are in the start-up stage, you may need to make an initial investment in advertising and marketing to get yourself known in the market.

In a nutshell, Artificial intelligence can help you determine the costs of your new venture by providing you with information and resources relevant to your specific project.

However, it is important to note that costs may vary depending on the industry, the size of the company and the stage of development. It is important to make a careful assessment of costs in order to determine an appropriate selling price and to ensure that the business is viable in the long term.