Generally the benefits of Fixed Cost calculations are:
- Fixed costs must be considered when pricing the products or services to ensure an appropriate return on investment.
- Fixed cost allocation allows management to make informed economic decisions and gives investors a clearer picture of a company’s actual financial results.
- Management can use fixed cost allocation to justify expenditures, to motivate staff and to accurately measure income.
- During boom periods a fixed cost structure can generate huge profitability.
Based on fixed cost structure, there are several reasons why fixed cost Information Technology (IT) helps any business;
Unexpected costs hurt business cash flow
Low profits or a decline in revenue can hurt a business the same as a large expense a business will have to cover in variable costs if their IT network crashes. In an event such as this an independent IT service provider can charge a large amount to fix the problem because they understand the importance of keeping the business functional.
Fixed cost IT means you cover the highs and lows of IT activity needs.
It helps develop an IT strategy
Many organizations that have reached the state where their IT planning is pro-active rather than reactive and have used the strategic plans and tactical plans as the litmus test for whether a project should be funded. All business embrace the notion that IT planning needs to go beyond simply including IT spending in the current year’s budget process. The only way to meet the current and future needs will be to have a comprehensive plan that reviews the current requirements and accurately forecasts spending over a multi-year timeline.
Having a budget helps you stick to it
During the budget process, consideration should be given to whether your IT is a fixed cost; not only are you allowed a clearer view of the value the department is providing to your business, but it also highlights other areas where your business might not be as efficient, not as efficiently budgeted or where you go over budget regularly.
The fixed cost will remain stable throughout a company’s day-to-day activities and growth process. Fixed costs are easier to account for as costs do not change relative to the volume of service provided. This is the complete opposite of variable costs, which can experience multiple price variances.
Eliminating Potential Disagreements
When both sides understand the details of a contract, there’s much less stress on the working relationship. A fixed price contract has a very clear value that leaves little room for argument over the life of the agreement.
Controlling Effort Level
The language of a fixed price agreement can control the effort and professionalism a contractor must exercise while working under the agreement. This allows a small business owner to control how dedicated an independent contractor is to the project as well as the quality of work the contractor produces. If you believe the contractor did not put forth sufficient effort, you’re within your legal rights under the terms of the agreement to terminate the contract and withhold payment. This means you will receive a consistently high level of service and efficient problem resolution from support staff that have a thorough understanding of your network.
Reduction in fixed costs
IT has, in many cases, reduced fixed costs over time, leading to more entrants, particularly in industries where there is high demand for variety. Even in commodity industries, rapid reduction in costs and rapidly growing markets offer a fertile ground for competition meaning fixed cost IT is even more affordable to all businesses.
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