Variable costs are supposed to be your friend.



They only increase when sales increase, right?

Wrong.

Variable costs can destroy profit margins faster than a market crash if you're not watching them carefully.

Here's the trap: As your business grows, variable costs often grow faster than revenue. What started as 25% of sales slowly creeps to 35%, then 45%.

By the time you notice, your earnings improvement has vanished.

The Direct Materials Audit:

Start with raw materials—often your largest variable cost component.

Can you get significant discounts by purchasing larger quantities? What are the carrying costs involved? Are there cheaper alternative materials that maintain quality?

These questions reveal immediate cost reduction opportunities.

Labor Cost Analysis:

Are you using subcontract labor at competitive rates? Are overtime wages costing more than adding workers? Are staffing levels optimized for current production needs?

Labor efficiency directly impacts business efficiency and overall competitiveness.

The Volume-Price Relationship:

Many business owners miss the inverse relationship between volume and unit costs. Higher volumes should reduce per-unit variable costs through economies of scale.

If your variable costs aren't decreasing as volume increases, you're missing critical optimization opportunities.

Packaging and Shipping Optimization:

These "small" variable costs often hide significant savings. Negotiate shipping rates, optimize packaging sizes, consolidate deliveries.

Every variable cost reduction drops directly to your bottom line growth.

The Monitoring System:

Track variable costs as a percentage of sales monthly. Any upward trend signals immediate investigation.

Smart business optimization means variable costs should improve with scale, not deteriorate.

Don't let variable cost creep silently destroy your profitability.