If you’ve been tuning in to Food For Mzansi TV over the past few days, your business and finance knowledge has already shot up. We’ve discussed everything from how to plan and develop a budget to the ups and downs to having debt. On today’s episode, however, we get into something you might not have heard of – variable expenses. Luckily, we have Bertie Hamman, senior manager of agribusiness at Standard Bank, to help us understand what variable expenses are, and to answer the question, “How variable are these expenses really?”
What is a variable expense?
Before we dive in, we should start at the foundation. If you’ve never heard of either variable or fixed expenses, you’re like quite a few business owners and regular Joe’s out there. Fixed expenses are expenses that you will pay whether you are using the service that month or not (like warehouse rent), while variable expenses are constantly changing, depending on your usage (like your monthly electricity bill).
The variable expense trap
Sometimes, variable expenses aren’t as variable as they seem. In a sector like agriculture, where things change constantly and rapidly, things are rarely as cut and dry as they appear on paper. To help farmers and agribusiness owners understand this, Bertie describes what he calls the “variable expense trap”. Essentially, by planning your budget properly and working towards your budget’s objective, any variable expenses you have planned out will become fixed. If you’ve set your budget objective too high, but don’t make the income you expected, you will still be stuck with all of those fixed expenses. This can cause a lot of financial trouble if you’re not careful.
(Be sure to watch the episode of Food For Mzansi TV, where Bertie explains in detail what the Variable Expense Trap is, and why it’s so crucial for you to be aware of it.)
In my farming business, should most of my expenses be variable or fixed?
You may think that many of your expenses would be variable (such as how much feed to buy, or how much pesticide you will need for this period), but once your expenses have been outlined in your budget, they become fixed, says Bertie. This is why budgeting is so important. If you’ve set your objective at too high a level, your expenses will be much higher than your income, and you’ll fall into the variable expense trap.
How can I avoid falling into the variable expense trap?
- Set a realistic and attainable objective: When setting up your budget, your objective is the focus around which you structure all your expenses. As long as you are realistic and not overly ambitious, you should be able to cover your fixed and variable expenses.
- Prepare a well-structured and easy-to-follow budget and stick to it: As long as you stick to your guns and follow your budget closely, you shouldn’t have any pitfalls that lead you into trouble. Avoid those “bargains” that deviate from your budget and can trip you up.
- Try to keep your expenses as variable as possible: We know that this is pretty tough to do, especially considering your budget, but if you buy your farming assets on consignment, you will only pay for what you use.
- Rent until you can afford to buy: Instead of jumping for that bargain tractor, rent your mechanical equipment on a per hour basis until you can afford to pay for good-quality equipment
- Avoid buying “just in case”: If you only need ten bags of seed, and you only budgeted for 10, there’s no need to buy twelve, just in case. Stick to your budget as much as possible.
- Be aware of your purchases: Know what you are buying and consider the implications. Is this something you actually need, or are you just buying it because you can?