Variable costs are a consistent worry for businesses of all sizes. What exactly are variable costs, however, and why is it a good idea to keep track of them?
How to define variable costs
A variable cost is defined as one that rises and falls with the production volume of the company. It can include things like raw materials for items or could be something such as credit card fees, both of which rise or fall parallel to sales.
What variable costs do sole traders have?
As sole traders are far smaller than corporate businesses, they should have different variable costs. This does of course change depending on the size of the business. For example, due to the charge on credit cards, a small business might not accept them in order to avoid that variable cost.
On the other hand, a small business might not be able to afford the wages of a second employee at the business. Instead, they would choose to have the labor done by other sole traders. This would mean that employee wages are a variable cost, as both the cost of and employment times of those working with the business would not be consistent.
Keeping track of variable costs
Variable costs change quite often. Due to this, every business has to have a way to keep track of their expenses from month to month, namely a budgeting sheet. The interesting thing about variable costs is that they’re not frequently tracked.
They are of course all noted down and accounted for, but to pay for them as a small business, oftentimes it’s simpler to just put a sum of money aside to cover them as a whole. In the beginning, this cost is unknowable, but as time goes on, you can start to build an average in order to cover the expenses as they come.