Long-time friend of MANA Bob Reiss has graciously allowed Agency Sales magazine to serialize his book Bootstrapping 101: Tips to Build Your Business with Limited Cash and Free Outside Help, available now on Amazon.com. The book looks at surprisingly effective low-cost and no-cost ways to acquire the resources you need to run your company. Whether your company is an existing enterprise or a start up, a manufacturers’ representative company or a manufacturer, this book will introduce you to innovative ways to cut your costs and drive more of your income into bottom line profits.
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A fixed cost is one that your business incurs whether or not it makes any sales. An example is rent: it has to be paid every month whether or not you’re generating any income, and it’s the same every month.
A variable cost, by contrast, is incurred only when you make a sale. A variable cost usually varies directly with the amount of the sale. A commissioned salesperson, for example, is a variable cost. If the person is getting paid 10 percent of sales, and the sales for a given month are $25,000, then that person gets $2,500 in commissions. If sales drop to $1,000, then the commission drops to $100.
Maximizing variable expenses reduces the amount of capital you’ll need to handle overhead and operating expenses in slow selling periods. A low monthly fixed expense ensures that you’ll get to breakeven (and even profits) faster. As a general rule, investments in overhead should be made only when you have a degree of certainty about the product and when customer demand is (1) strong and (2) well understood.
Here are some examples of fixed costs that can be converted to variable:
- Sales
Instead of hiring full-time salespeople and getting burdened with their weekly or monthly wages, go with independent sales representatives (reps) who will work on a percentage basis. You also pay none of their expenses. Ineffective reps are easier and less costly to replace than full-time salespeople, and they don’t present the burden of benefits, which can run as high as 30 percent of the salary of a full-time employee. Reps should have strong relationships with customers in their territory, which can translate into quick access and orders. Reps can specialize in an industry, work geographically, or sell to specific accounts.
- The Factory
You don’t have to own a factory just because you want to produce, assemble, store, ship, and build your product. Contract manufacturers are happy to do all or some of the above for you. (Find them on search engines or the yellow pages.) They charge either for the space you take up and/or the functions you ask them to do. Most will work out a deal with you to charge a percentage of your billing. This then makes this a variable expense. Either way, this represents a huge saving in fixed and operating costs. Contract manufacturers also maintain insurance on your goods in their possession. They cover the cost of their employees’ benefits. Yes, there are some downsides — including the fact that you may have to vie with their other customers for priority. Here persuasion and salesmanship are your best weapons. As soon as your volume warrants it, allocate a full-time person to cultivate the relationship with your “extended factory.” At some point, you may even want to position your employee on their premises for more control (and reduced risk).
You may have the type of product that would permit you to pay another manufacturer to make it for you under your brand. (This would be their “private label.”) Products like beer, liquor, drugs, and computers are often made under this kind of arrangement.
- Administration
Guess what? Your billing, sales reports, commission statements, royalty statements, inventory reports, and aging reports can also be done on a percentage basis by your contract manufacturer. Of course, the more functions you outsource, the higher your percentage payment will be. But remember: everything that you’re outsourcing is a function that you’re not hiring a salaried body to perform. And it’s not just bodies either. Why should you pay for the latest computers and software to run them — especially if they’ll only be used for a small fraction of the working day? Pay someone else to worry about that. You also don’t have to pay the price of obsolescence, which can be very high in the world of computers. Your customers will have absolutely no idea that these functions are being outsourced. (They probably wouldn’t care if they did know.) And your company takes on the aura of a well-established business from the outset. There are companies that specialize in doing all the administration for you.
- Inventors/Designers
You can get quality people to invent, develop, and/or design product for you on a percentage of the products’ billing—in other words on a variable expense basis. Many will want to work on up-front fees only (fixed expense). Salesmanship on your part can get them to charge your way (variable expense). If they are sold on your company, you personally, or the product, they are more likely to comply with your wishes. Sometimes a compromise is required where you pay a modest up-front fee and a modest percentage on sales of the product.
- Public Relations
This is a special section in itself, but there are some public relations firms that will charge on performance. Usually, they only work on a fee basis. A performance-based agreement (variable expense) should be carefully spelled out — specific accomplishments and their exact costs. Usually in start-up or early stage companies, the principals need to do their own public relations. Some of the ways were spelled out in the public relations section earlier in this book.
Converting fixed to variable costs is a major way to reduce your need for money. It could also be the difference between success and failure for young companies. Every fixed cost should be scrutinized for conversion to a variable cost. You might be surprised how many can be converted.
As you grow your company, there may come a time when the company volume reaches a level where the fixed cost is less expensive than a variable one. However, before you switch, make sure you can maintain this high volume. Do not switch on the basis of sales projections or a one-time uptick.
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