There are times in our lives when we wish that we can make some expenses stable and there are other times that we wish that we can make our expenses flexible. So let’s look at some ways we can convert certain expenses to fit our financial needs.
First off, let’s look at some ways we can convert certain fixed expenses.
Fixed expenses are a stable cost because they do not fluctuate with increases and decreases in activity levels. One fixed cost that businesses experience a lot of, is salaries. Several businesses pay their employees on a fixed hourly or base pay per job. This can be a very big disadvantage for a company when their sales decrease, because even though their income has went down they still have to pay their employees for the time they have put in. If you are a company that experiences huge fluctuations in your sales, you can always covert many of your salary bases into commission pay, which now makes it a variable cost. This way if your company experiences a decrease in sales, your employee salaries decrease as well.
Sales price is also another fixed cost that businesses have, which can easily be converted into a variable cost. You can offer your customers a discount on the normal fixed product price if they buy two or more of the same products. For example, if you sell shampoo and your customer orders three bottles you can give them a $1.50 discount. By doing this you have just momentarily changed a fixed cost into a variable cost and possibly increased sales, as a result, by giving the customer a discount.
On the individual note, rent is the biggest fixed cost many of us experience and it is a stable cost because it remains the same every month. The way you can turn it into a variable cost is to work out a plan with your landlord on working off some of your rent. This can be a handy way to change this cost’s behavior if your financial picture looks grim that month.
Now let’s look at how we can convert variable expenses.
Variables are expenses that directly change with the ups and downs of activity. One of the most common variable costs that individuals and businesses experience is utility bills. A utility bill such as your light bill, changes from month to month, depending upon how much you use your electricity. Now the electric companies have offered a way to convert this bill into a fixed expense, by offering the budget pay option. The budget pay option is based upon the average cost of your overall bills during the year. This average amount is what you pay each month no matter how much you use or don’t use your electricity.
Groceries is another variable cost that I think every household experiences. Some of us experience high grocery bills and others experience relatively low grocery bills. It all comes down to the size of the family as a factor the greatly decides how large your grocery bill will be. The good news is that this variable expense is easily converted to a fixed expense, by setting aside a specific dollar amount each month to use just for your grocery bill. This makes budgeting easier, but the bad news is that in reality you will always have that unexpected grocery item expense (i.e. more chips for a party) that you need buy and will generally not be included in that budgeted amount. So you will always have that uncertainty of a possible variable expense to occur again.
Are mixed costs easily converted?
Mixed costs are probably the hardest and the most miserable costs to even try to convert to fit your financial needs. Mixed costs are costs that have two parts; a fixed rate and a rate that varies with activity. Cell and land line phones are great examples of mixed costs, but they are also among the hardest to convert to a straight fixed/stable type cost.
You can choose a cell phone plan that will give you tons of minutes, unlimited texting, and free night and weekend minutes, which allows you to claim a fixed expense for this service. But the reality is that if you go over your required minutes, the cell phone company will still charge you for each additional minute that you go over, so this has just attached a variable cost to the mix. The only way to keep your cell phone bill a fixed expense is to watch your minutes and make sure that you do not go over.
Telephone companies have made it easy for you to convert your land line phone from mixed cost to a fixed cost. The way it was, the phone company would charge you a base rate for all of your services, except, your long distance bill. This is where it made it a mixed cost. But now telephone companies offer their customers to pay a base rate for unlimited long distance, which now keeps this bill a fixed cost if you choose to go that route.
Another major mixed cost that most of us have is doctor bills. Doctor’s offices generally charge you an office visit of around $50-$60 dollars per visit and this is just so you will be able to see what the doctor looks like that day. This base rate does not include anything extra like X-rays, blood tests, urine tests, etc… Anything extra over just saying hi to the doctor will cost you extra money. So because of the way this mixed cost behaves in its nature, it would be really hard to even convert it to another type of cost.
As you can see, certain mixed costs have the ability to be converted to another type of expense, but they can drive you crazy when you try to convert some of them.
Learning how your expenses behave is essential when you are working on a solid, individual financial plan (i.e. budgeting) or making future projections (i.e. profit increases) on where your company will be in the future. If you understand how costs behave you will be able to plan out when you can convert certain types of costs to fit your financial needs.