If a business is making money, all’s good, right? What a perfect world we’d be living in if that were true. Yes, generating revenue is a major component of a successful business. But, the flip-side to that coin is managing costs.
A significant portion of the expense sheet comes from ongoing costs. These come around every month and are directly tied to profitability. Managing these costs, and finding ways to control or even lower these costs, is why financial advisors make the big bucks. Before getting to the math gymnastics that keep businesses in the black, there’s a lot to know first.
Ongoing costs, also called “operating costs,” are expenses that come with a business's administrative, operational, and maintenance requirements. Ongoing costs are a component of a company's operating income as reported in its financial statements and often make up a significant portion of the expense sheet.
On the other end of the spectrum, you have one-time expenses, which could be larger capex expenses, severance, or other irregular cash outlays.
Anything that is budgeted for over consecutive months, quarters, and years is considered an ongoing cost. Examples include marketing expenses and software-as-a-service (SaaS) subscriptions.
Ongoing costs include fixed costs and variable costs that contribute to everything needed to keep the business up and running. Fixed ongoing costs are consistent month-to-month, which makes them easier for businesses to build into their budgets.
For example, office rent or payroll for full-time employees. Variable costs, on the other hand, change each month based on production. Variable costs include material costs and electricity. Businesses with higher fixed ongoing costs benefit from more predictability. However, businesses with more variable ongoing costs can be more flexible.
Ongoing costs can be calculated using information from the balance sheet. Ongoing costs are the costs of goods sold (COGS) plus operating expenses. Operating expenses include things like utility expenses, sales expenses, and accounting fees. COGS include items that are directly tied to production, such as materials or direct labor. Once you calculate ongoing costs, you can begin to understand how they impact your business and add value to the business by suggesting areas for cost reduction.
Businesses track ongoing costs separately from costs that aren’t essential to running the business (like interest on a loan) so that the finance department can analyze which costs are contributing to the success of the business and where it’s possible to cut back. Profit can be increased by raising revenue or lowering operating costs. Some ways to reduce operating costs may include finding a less expensive office space to rent or closing the business on less profitable days to reduce overhead costs.
Ongoing costs can also be used to generate future projections. When a business knows that it incurs the same costs on a recurring basis in order to generate profits, it’s easier to predict how finances will change in the future. This makes it easier to plan for larger, one-time expenses and investments. These are the decisions business leaders will look to financial planners to inform them on.
Ongoing costs should be compared over multiple reporting periods to understand trends. If a business’s ongoing costs are consistently rising without profits also increasing, that is an obvious cause for concern.
It’s important for the finance department to determine which costs can be reduced without hurting the business’s productivity and profitability. This is an excellent way for financial advisors to add value to the business by speaking to various department leaders. What may seem non-essential to an outsider may actually be very important to keep the business functioning well.
Every business has different opportunities to manage these costs, and the answers are in the numbers. Some common strategies for reducing ongoing costs may include reducing marketing spend, downsizing the office, or staff reductions (a more severe strategy that could hurt morale).
If you know that a majority of your business’s sales leads or customers come from marketing, cutting back marketing expenses is probably not the best choice. This is why it’s important for an in-house finance team to have a strong grasp on all of the business’s departments and build close relationships with team leaders.
Many businesses uncovered an unexpected way to reduce operating expenses during the COVID-19 pandemic when employees began working remotely. While this decision was based on necessity rather than a desire to reduce ongoing expenses, it’s a good example of the tough decisions businesses have to weigh when trying to reduce costs. Many businesses are now facing the conundrum of whether or not to reopen offices. The savings of the reduced operating costs must be balanced with concerns about employee productivity.
Businesses need to spend money to make money. Whether it’s marketing, technology acquisitions, branch expansions, talent acquisitions, there are ongoing costs inherent with many business expenses. Staying one step ahead of these costs is critical to healthy growth.
This is where Causal’s data modeling and integrations can help. Inside Causal, financial planners can collect and analyze ongoing costs to find the trends, positive or negative, to get ahead of expenses before they get out of hand. This is a key part of developing a smart growth strategy and not biting off more than the company can chew.