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Ever feel like your business expenses are constantly shifting, making it nearly impossible to get a grip on your cash flow? For many small business owners, variable expenses are like a moving target, throwing off budgeting plans and financial stability. But once you know how to calculate and manage these expenses, you’ll discover a whole new level of financial control.
Why variable expenses matter
Variable expenses are the costs that change from month to month based on your business activities. Expenses like inventory purchases, shipping costs, or utilities. They’re tricky because they’re unpredictable, but understanding them is essential for budgeting and maintaining cash flow.
According to a report by the U.S. Small Business Administration, about 82% of small businesses fail due to cash flow issues. A big reason? Not properly accounting for variable expenses. Mastering this part of your finances can mean the difference between thriving and just surviving.
How to calculate variable expenses
Step 1: Track your variable expenses consistently
The first step to taking control is simple: start tracking your variable expenses. You might already be doing this, but the key is to make it consistent and accurate. Use accounting software or apps that automatically record expenses as they happen.
Consider using Forwardly to automate your bill payments and maintain accurate records of variable costs. With features like scheduled payments, instant transfers, and flexible payment options, it eliminates manual hassle and gives you a clearer view of your expenses.
Step 2: Categorize expenses
Not all variable expenses are created equal. Breaking them into categories makes it easier to spot trends and control costs. Here are some common categories:
- Inventory and supplies: Costs for purchasing goods or raw materials. For a clothing retailer, this could mean fabric, buttons, or zippers.
- Operational costs: Shipping, packaging, and logistics. If you’re running an e-commerce store, these costs can spike during peak seasons.
- Utilities: Electricity, water, or internet services that vary based on usage. A marketing agency might see its electricity costs rise during busier months.
- Marketing and sales: Advertising expenses that fluctuate with campaigns or seasonal promotions. For instance, a holiday marketing push could significantly increase ad spend.
Categorizing helps you identify which costs are controllable and which are necessary for growth, making it easier to adjust as needed.
Step 3: Calculate your average variable expenses
Once you’ve categorized your expenses, the next step is to calculate your average costs. Review the past three to six months of expenses in each category to find a baseline. This can be as simple as adding up your total spend and dividing it by the number of months.
For example, if your monthly packaging costs have been $300, $500, $700, $600, $400, and $800 over the past six months, your average comes to $550 per month. This average can help you plan for future budgets and avoid cash flow surprises.
Step 4: Adjust for seasonality and growth
Your business isn’t static, and neither are your business expenses. Consider how seasonality or growth might impact your variable costs. For instance, a landscaping company may have higher fuel costs in the summer, while a retail store might spend more on packaging and shipping during the holiday rush.
To prepare, analyze past spending patterns and adjust your budget accordingly. Cash flow forecasting can help you anticipate these shifts and set aside funds for peak months.
Step 5: Make your cash flow plan flexible
Once you have a good handle on your average expenses, create a cash flow plan that allows for flexibility. This means setting aside a contingency fund for unexpected costs, like a sudden spike in demand or supplier price hikes.
For example, if you run a bakery, you might set aside extra funds during the winter when heating costs rise. Similarly, a tech startup might keep a buffer for unexpected cloud service fees during product launches.
Practical tips for staying on top of variable expenses
- Set alerts for high spending months: Use software that notifies you when expenses exceed your budgeted amount.
- Automate repetitive payments: Forwardly makes it easy to automate your most common variable expenses, so nothing slips through the cracks.
- Regularly review your expense data: Monthly or quarterly check-ins can keep your budget aligned with reality.
Variable expenses can be tough to manage, but with a consistent approach and the right tools, you can take back control. Want to simplify how you manage your variable expenses? Try Forwardly for seamless payment automation and accurate tracking. Your cash flow will thank you.
