Sep 25, 2012

3 Ways to Reduce Fixed Costs

Over the past several years, small business owners have become pros at whittling their expenses to stay in line with actual revenues. Fixed costs that add up to a large monthly nut are harder to chip away. You need a total revolution in your way of thinking to get rid of these. Here are three examples of smart moves to cut fixed costs. Outsource Services Reuben Advani, author of The Wall Street MBA and president of Telestrat Education, a company that trains professionals in the areas of corporate finance, saved on fixed costs by eliminating his in-house sales and marketing teams. He outsourced sales functions to a rep he found through an agency. The rep makes phone calls scheduling appointments with prospective clients and tracks the progress and the hit rate. Advani outsourced marketing “to a number of providers in the direct mail space,” he said in an interview. He even hired an outside designer rather than keep one on staff. His goal: to keep costs variable, not fixed. Outsourcing is not the only way to keep staffing costs down. Another small business owner realized that he could keep his fixed costs under control by using students to fill his company’s graphic design and technology-related positions. Barry Weinstein, the 21-year-old founder of Pillowcase Studies, whose product is silkscreened pillowcases that feature cheat sheets on various academic subjects, wrote in an email that he has found he “can significantly decrease spending by using qualified  student designers and screen printers. The same goes for web development. Students are cheaper [and] often more motivated...” Don’t Drain Cash for Your Equipment A small P.R. agency in the New York area needed to replace its computer equipment. The cost to purchase it outright would be $250,000, but the owner quickly ruled that out, as cash flow was not predictable enough in this economy. Other options were to tap the company’s bank line of credit or take out a term loan with the bank where the business has its accounts. The argument against the first is that the line of credit is a rainy day fund and should not be used for an investment in capital equipment; and the argument against the second, a bank loan, is that until the loan is paid off, any new needs for credit would probably be denied, because there is a ceiling to what the bank will offer. The P.R. agency chose as its solution a lease with a third party financing company, which had several advantages: This essentially expanded the business’ creditworthiness and its ability to borrow, its cash was preserved, and in addition, the finance company took an investment in the equipment, lowering the P.R. agency’s total lease amount. Arthur Freierman, president of Southbridge Financial Corporation in New York, wrote the lease after explaining various options to the customer. In an equipment lease, he said, “you have two ways to go. If it’s your basic computer equipment for the firm and you feel you’re going to be using it for four or five years, then you wouldn’t want to do a three-year lease where at the end you’re going to have to extend the lease or purchase the equipment.” You’d be better off with a so-called Dollar Buyout Lease (also called a Capital Lease or a Finance Lease). But if your firm needs to use the latest equipment, as some professional firms do—law firms or graphic design firms, for example—and so would likely buy new equipment in three years, you would want to do a Fair Market Value Lease (also called an Operating Lease), and at the lease’s end, return the equipment to the leasing company. Here’s the math: “On PCs, the most [the leasing company] can hope to realize at the end of three years would be 10 to 15 percent, and that means that today we would invest between 4 and 7 percent,” Freierman said in an interview. On a 36-month lease, for $250,000 worth of equipment at 8 percent interest, the PR agency would pay $7,782 per month, he calculated. But if Southbridge invested 5 percent, the amount that has to be paid off is 95 percent of $250,000, so then the payment would be $7,390 per month. The customer would save about $400 a month for 36 months by doing this type of lease. Use Shared Office Space This solution is useful for companies that are starting to grow as well as those that are cutting back. Robert Nishida CEO of HDDS Design, a Southern California–based digital signage software designer, uses a virtual office address in a prestigious tower in Woodland Hills but actually works from his home 30 miles away. Through Regus Virtual Office, he has a receptionist to take his calls and collect his mail, and he can use meeting space at Regus for client conferences. Regus is one of the biggest providers of virtual or shared office space, with 475 locations in the U.S. and more than 1,200 worldwide. All locations have a reception area, meeting rooms with videoconferencing capabilities and private offices. Contracts are negotiated individually, according to a Regus spokesperson, so you can sign up to have meetings once a month or twice a week, or whatever works for you, and your monthly fee reflects that projected level of usage. There’s no long-term commitment. You can change your business plan, your business address, even your city and state with little effort. Another provider of virtual space is Davinci Virtual, which has more than 300 locations worldwide and more than 10,000 virtual clients. One of them is Kitchen Kings CEO Anthony Saladino, whose focus is solely upon internet sales and consequently has no need for a showroom. A nice address in New York City, however, does provide the company instant credibility. The address appears on his website, on printed materials, and business cards. The cost: about $50 a month.