Why is knowing the cost structure (High Fixed Cost vs High Variable Cost) relevant in profitability cases? Is it because fixed costs are harder to control and in turn, reduce?
Why is knowing the cost structure (High Fixed Cost vs High Variable Cost) relevant in profitability cases? Is it because fixed costs are harder to control and in turn, reduce?
Hi there,
I wouldn't say it's specifically because fixed costs are harder to control.
Rather, in all aspects of casing you need to understand the nature of the beast better! Segmenting and categorizing things helps you do this. Essentially, it helps you understand where to go next.
My Advice For Cost Cutting
In general, for determining cost issues, you need to break down the problem into a tree/root-cause analysis and ask the highest level (but specific) questions first! In this way, you essentially move down the tree.
How do you identify where to look? Well, you need to look into whichever of the following 5 make the most sense based on where you are:
For more background on analyzing costs, look here:
https://www.preplounge.com/en/consulting-forum/structure-breakdown-for-costs-7963
https://www.preplounge.com/en/consulting-forum/inventory-costs-how-to-segment-6861
There are many reasons for why you want to understand the nature of the cost structure.
Cost reduction is one as you mentioned. Another one is the understanding of operational leverage to grow profitability through increasing sales:
Understanding this can help you identify the right approach to increase profitability.
(editiert)
Hello!
Those are very different in nature, since variable costs depend on the output.
Hence, different cost structures make totally different business models (e.g., the higher your fixed cost in a transformation or recovery, the more difficult is going to be to turn arround)
Hope it helps!
Cheers,
Clara
Correct. You want to know the cost structure to see if it is a problem to begin with and then if it will be easy to solve. Theoretically variable costs are easier to control in the short term vs fixed costs. Practically though its a lot more complicated than that.