Cost conversion

There are times in our lives when we want to be able to stabilize some expenses and there are other times when we want to be able to make our expenses more flexible. So let’s look at some ways we can convert certain expenses to fit our financial needs.

First, let’s look at some ways that 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 companies experience a lot is wages. Several companies pay their employees on a fixed hourly or job-based wage. This can be a huge disadvantage for a company when their sales decline, because even though their income has dropped, they still have to pay their employees for the time they have invested. If you are a company that experiences large fluctuations in your sales, you can always convert many of your salary bases into commissions, which now makes it a variable cost. In this way, if your company experiences a decrease in sales, your employees’ salaries also decrease.

The selling price is also another fixed cost that companies have, which can easily be converted into a variable cost. You can offer your customers a discount on the normal fixed price of the product if they buy two or more of the same products. For example, if you sell shampoo and your customer orders three bottles, you can offer a discount of $ 1.50. By doing this, you have just momentarily changed a fixed cost to a variable cost, and as a result, you have possibly increased sales by giving the customer a discount.

On an individual level, rent is the largest fixed cost that many of us experience, and it is a stable cost because it stays the same every month. The way you can turn it into a variable cost is to work out a plan with your landlord to reduce some of your rent. This can be a useful way to change the behavior of this cost if your financial picture looks bleak that month.

Now let’s see how we can convert variable expenses.

The variables are expenses that change directly with the ups and downs of the activity. One of the most common variable costs experienced by individuals and businesses is utility bills. A utility bill, like your electric bill, changes from month to month, depending on how much you use your electricity. Now the electric companies have offered a way to turn this bill into a fixed expense, offering the option of budgeted payment. The budgeted payment option is based on the average cost of your total bills during the year. This average amount is what you pay each month regardless of how much you use or don’t use your electricity.

Groceries are 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 family size as a factor that largely decides how big 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, in reality, you will always have that unexpected expense on grocery items (that is, more fries for a party) that you need to buy and it usually won’t be included in that amount. budgeted. This way you will always have that uncertainty that a possible variable expense will happen again.

Do mixed costs convert easily?

Mixed costs are probably the most difficult and miserable costs to try to convert to meet your financial needs. Mixed costs are costs that have two parts; a fixed rate and a rate that varies with the activity. Cell phones and landlines are great examples of mixed costs, but they are also among the most difficult to convert to a fixed / stable rate cost.

You can choose a cell phone plan that will give you tons of minutes, unlimited text messages, and free minutes at night and on weekends, allowing you to claim a fixed expense for this service. But the reality is that if you exceed the required minutes, the cell phone company will still charge you for each additional minute that passes, so this just added a variable cost to the mix. The only way to keep your cell phone bill a fixed expense is to keep an eye on your minutes and make sure it doesn’t go overboard.

Telephone companies have made it easy for you to convert your landline from mixed cost to fixed cost. As it was, the phone company would charge you a base rate for all your services except the long distance bill. This is where you turned it into a mixed cost. But now phone companies offer their customers to pay a base rate for unlimited long distance, which now keeps this bill at a fixed cost if you decide to go that route.

Another big mixed cost that most of us have is doctor bills. Doctors’ offices generally charge you for an office visit of around $ 50 to $ 60 per visit and this is just so you can see how the doctor looks on that day. This base rate does not include anything extra like X-rays, blood tests, urinalysis, etc. Anything additional than just saying hello to the doctor will cost you extra money. So because of the way this mixed cost behaves in its nature, it would be really difficult to even convert it to another cost type.

As you can see, certain mixed costs have the ability to turn into 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) about where your business will be in the future. By understanding how costs behave, you can plan when you can convert certain types of costs to meet your financial needs.