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Misunderstanding the expense structure

Publication date: 
July 2009
Author: 
Dr. Albert D. Bates, Profit Planning Group

The sales challenges associated with the recession have caused most firms to take a serious look at their operating expenses. Obviously, most of the effort has focused on cutting expenses. While that is an important task, a more fundamental issue is determining the nature of the firm's expense structure. That is, deciding whether the organization should build a heavy fixed-expense structure or whether it should rely more on variable expenses.

Examining the expense structure is not an academic issue. The ability to put in place an expense profile that reflects the firm's strategic posture is essential to long-term success. It also has major implications for the ability of the firm to withstand current and future economic challenges.

This report will examine the expense structure of EASA members based upon the 2008 Operating Performance Survey Report. By definition the discussion will be somewhat technical. However, it is extremely important. The report is organized into two key sections:

  • Why the Fixed Versus Variable Distinction is Important - This section will analyze how changes in the mix of fixed expenses versus variable expenses alter the firm's response to different economic conditions.
  • Changing the Expense Structure - This will provide a road map to the actions that can help the company alter its basic expense structure.