What Are Variable Costs And How Do They Affect Businesses In Procurement?
As a business owner, you already know that running and managing your enterprise is no easy feat. One of the most important aspects of keeping your business afloat is being aware of the different costs involved in procurement. Some expenses are fixed, while others vary depending on several factors – these are what we call variable costs. In this blog post, we’ll delve deeper into variable costs and how they impact businesses in procurement. Whether you’re new to the game or an experienced entrepreneur looking to brush up on your knowledge – keep reading!
What are variable costs?
Variable costs are those that change in direct proportion to the level of output produced by a business. They are also known as direct costs, because they directly affect the cost of producing goods or services. The most common examples of variable costs are raw materials and labour.
Fixed costs, on the other hand, are those that remain constant regardless of the level of output produced. They are also known as indirect costs, because they do not directly affect the cost of producing goods or services. The most common examples of fixed costs are rent, utilities and insurance.
In procurement, businesses need to carefully consider both types of costs when making purchasing decisions. This is because the price of goods or services is not always the only factor that affects the bottom line. For example, if a business is considering switching suppliers for a raw material, they will need to take into account not only the price per unit but also the variable costs associated with using that supplier (e.g., shipping).
How do variable costs affect businesses in procurement?
Variable costs are those that fluctuate with production volume, such as the cost of raw materials. They can have a big impact on businesses in procurement, as they can cause wide swings in the cost of goods sold (COGS). This, in turn, can impact the bottom line and cause financial difficulties for businesses that are not prepared for them.
To mitigate the effects of variable costs, businesses need to have a good understanding of their own costs and how they fluctuate. They also need to build up a buffer of cash or credit so that they can weather any short-term spikes in COGS. Finally, they need to keep a close eye on their competitors, so that they can adjust their prices accordingly.
How can businesses manage variable costs?
Variable costs are those that fluctuate with production volume, and they can have a big impact on businesses, especially in procurement. To manage variable costs, businesses need to understand what they are and how they work.
Fixed costs, like rent or insurance, stay the same even when production volume changes. Variable costs, however, change along with production volume. For example, the cost of raw materials is a variable cost because it varies based on how much product a business is making.
Variable costs can be managed in a number of ways. One common method is to set budget limits for each variable cost category. This ensures that expenditures stay within predetermined limits and helps avoid overspending on one area while under-spending in another.
Another way to manage variable costs is through price controls. This means setting maximum prices that can be paid for certain items or services. This helps businesses avoid paying too much for things like raw materials or outside services.
Finally, businesses can try to negotiate better prices with suppliers for items that make up a significant portion of their variable costs. This can be done by bulk ordering or signing long-term contracts. By getting better prices on these items, businesses can save money overall even though their individual unit price may be higher than if they had purchased the item on the open market.
Conclusion
Variable costs are an important part of any business, and understanding how they affect procurement is a vital part of effective management. By monitoring your variable costs carefully and being mindful of potential risks, you can ensure that your business remains profitable while keeping its procurement process efficient. With the right strategies in place, variable costs can be used to maximize efficiency and minimize waste across all areas of your business operations.