Fixed-cost management can prevent crises in tough times

Variable costs are those incurred in relation to revenue or sales. These types of costs tend to be higher when there is an increase in sales. For example, in a retail business, people costs such as salaries and employee benefits can be increased because of adding new salespeople after opening a new store. However, when sales drop because of the closure of an under-performing store, people costs may drop accordingly. On the other hand, fixed costs are less affected by revenue changes. These may be expenses incurred by supporting departments such as finance, human resources, administrative, and information technology. 
Management will normally review the profit-and-loss statement at least monthly to understand the company’s performance so that necessary action plans can be developed and implemented accordingly.
When the market slows down, sales revenue may drop so significantly that the bottom line of the business becomes negative. It is crucial that management come up with countermeasures to mitigate the deteriorating performance. One area to look at is cost controls. 
While several variable costs are likely to be managed according to the short-term sales trend, fixed costs are more difficult to adjust quickly enough. Therefore, management may have to look into quick-win alternatives to manage these costs.
Outsourcing: Some work at the back end may be handled by outsourcing companies. This choice can alleviate the costs associated with people. Some expenses such as repair and maintenance, administrative and professional work can be outsourced to a third party. 
Contract/agreement review: Certain outside service contracts may be signed for a long time without any review for reasonableness or necessity. It is possible that the company may incur certain costs for services that are no longer needed. It is worth investigating this type of regular expense to find room for cost improvement.
Annual bidding for certain contracts: Companies may acquire supplies and services from regular vendors for a long time without proper review on the |pricing. 
As time passes, the unit price of the items purchased may not be suitable. In this case, the company may organise an annual bid with a few suppliers for the purposes of price comparison and negotiation.
Consolidation of work: There might be opportunities for efficiency improvement through consolidation of different tasks. This job-function rearrangement and reorganisation can help maximise human resources and can enhance the morale and career paths for a number of employees.
In a tough business situation, many companies may choose staff cuts as a strong measure. Instead of such drastic action to manage fixed costs, the company should consider taking necessary action early so that the negative impact will be minimal. Thus continuous improvement on fixed-cost management becomes more necessary. 

Dr Yanyong Thammatucharee is senior vice president for finance and accounting at Central Marketing Group. He can be reached at yanyong@cmg.co.th.