In all businesses but especially in SME’s it is vital to understand why fixed overheads are so important.
The answer lies in the name. They are FIXED.
We live in changing and unpredictable times and so anything that restricts our ability to react quickly can be a problem. We saw during the pandemic that businesses that were able to change their structure quickly were, for the most part, the ones that survived.
Those with large fixed overheads in the form of rent, rates, staff, machine costs etc. received temporary help in the form of grants, loans and payment holidays but they still have to repay most of these. The ones with low fixed costs were able to ride the storm of low or no sales so much better.
In more “normal” times markets change or disappear rapidly, supply chains are unreliable and technology is advancing fast.
Fixed overheads are the chain that hold many businesses back.
Remember before committing to these costs that tomorrow is unlikely to look like today and what will you do with that asset or overhead when the world changes?
New forms of project evaluation are required to meet the circumstances of or changing world.
To be truly effective businesses must consider contribution analysis rather than old fashioned profit planning is the way ahead.
If you want to look at this further we have both manufacturing and service simulations to enable everyone to be more effective then please contact us for details – https://www.wellsassoc.co.uk/contact/
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