Advanced KPIs For Your Business - Part 3

Overhead isn’t the only expense. Businesses have variable costs as well. Variable costs refer to all the expenses related to producing and delivering the products and services sold by your business. Examples include manufacturing expenses for the creation of a physical product, such as a toy, and sales commissions.

3. Variable costs

Variable costs depend on the amount of product you sell, so the more units sold, the higher your variable costs. Tracking variable costs allows you to manage the expense of producing your offerings and to scale up production as your business evolves.

This means you’ll want to see variable costs decline as your sales volume grows through the advantage of economies of scale and efforts you make to improve production efficiency.

Tip: Because every product produced for sale has an associated variable cost, it’s helpful to track variable costs as an average to see it at the individual item level. This provides greater visibility into how variable costs change over time. To calculate average variable cost, add up your total variable costs and divide by the total number of units produced:

• Average variable cost = Total variable costs / Total number of units produced

Contact me if you want some help calculating this number for your business.

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My name is Diana Miret.? As a Christian fractional CFO, I provide financial counsel to businesses earning between $1M and $10M to increase profitability, optimize cash flow management and heighten financial confidence and clarity. You can find me at www.dianamiret.com