What costs should a business cut to survive the cost of living crisis?

Before deciding which costs to reduce it’s important to first clarify the three main types of business cost which every business has. These are:-

1 Cost of producing a product or delivering a service

These are costs which are directly linked to a sale. These costs must be incurred in order for a business to make a product or deliver a service to a customer.

Some examples of which are:-

• For a manufacturer that means the cost of factory staff & raw materials
• For a printer that means the cost of paper & ink & printing staff
• For a web designer that means the cost of web hosting fees & images.

ALERT

Remember these costs are directly linked to a sale so these costs are hard to significantly cut WITHOUT adversely effecting (ie reducing) your the sales price and/or quality of your service/product.

2 Business running costs

These are the day-to-day business costs and are commonly referred to as overheads. These costs aren’t directly linked to a sale. They typically include:-

• Premises costs : rent, rates, utilities, repairs, etc
• Marketing costs.: pay per click, Facebook ads, flyers, etc
• Staff costs : staff wages, sub-contractor cost, etc
• Office costs : stationery, insurance, accountancy, IT, telephone, etc.
• Finance costs : bank charges, loan interest, etc

Whilst none of these are linked directly to a sale most are still needed, to some degree, if a business is to function. Without them it simply won’t be able obtain or retain customers, eg a telephone is needed to communicate with customers.

3 Tax costs

A business which makes a profit will have to pay some tax – corporation tax paid by limited companies and Income tax & national insurance paid by sole trades and partnerships.

Tax is another cost which ultimately reduces the bank balance.