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Financial Efficiency for your Business: Understanding Fixed and Variable Costs

The way in which money is managed (regardless of the amount) can make all the difference regarding how financial success is achieved and maintained. The concept of financial literacy is an important and effective life skill (which should be taught as a regular course in school, but we digress); when someone knows how to best manage their money, they can effective plan a future with added confidence and consistency.

Managing the costs of a business is similar to that of a household: the objective is to ensure that everything is properly optimized so as to not unnecessarily waste resources (money, energy, time, etc). The main difference is that businesses usually operate on a much larger scale, however this same idea applies and is extrapolated to cover necessary elements to the business.

With managing anything comes fixed (initial purchase, regular updates/upgrades necessary to proper function) and variable (unforeseen fees, inflation, etc.) costs. The better prepared a business is for all expenses from the start, the less of an impact (especially for the variable expenses) will have. “The breakdown of a company’s underlying expenses determines the profitable price level for its products or services, as well as many aspects of its overall business strategy. A small business owner can use a knowledge of fixed and variable expenses to determine the company’s break-even point (the number of units or dollars at which total revenues equal total costs, so the company breaks even), and in making decisions related to pricing goods and services. Determining the fixed and variable expenses is the first step in performing a break-even analysis. The number of units needed to break even = fixed costs / (price – variable costs per unit). This equation provides a small business owner with a great deal of valuable information by itself, and it can also be changed to answer a number of important questions, like whether a planned expansion will be profitable.” (source: inc.com)

Once there is a solid comprehension of fixed and variable costs, a more thorough and in-depth look to determine exactly where the costs associated with all of your company’s IT consumption is spent can happen, and this is where we come in! Since the modern IT life-cycle is continuous and not linear, the approach to assessing IT consumption must be continuous, work at a high level and be able to grow and adapt to meet the specific needs of your business. To learn more about our software and our ‘Total Cost of Consumption’ concept watch this short video.

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