When sales fall, reducible costs are found in the history of the accounts

23 October 2026, 09:38

A reducible cost is an item that a company can bring back to the level it had in past years. On 23 October Volvo Cars, with third-quarter revenue down 23 per cent on a year earlier, announced a further SEK 5 billion of savings: by the end of 2027 its indirect spend is to be almost a quarter lower than in 2024, and variable costs will come down separately. These are two distinct families, and in a business they are measured in two ways.

Reducible is a judgement, not a category of cost

The split between fixed and variable costs describes how an item moves with volumes: rent stays the same whatever is sold, raw materials rise and fall with production. Reducible says something else, namely whether that item can be brought down. The answer comes not from the nature of the expense but from the history of the company's figures, account by account.

The criterion changes with the type of cost. A fixed cost is reducible when it has risen in absolute terms compared with the levels of previous years: if the company was already operating with a lower figure, the past shows that the business held up at that level. A variable cost is reducible when its incidence on turnover has risen, that is, the share of every euro of sales that goes to pay for it. That it grows in value when sales grow is normal; the signal is the share.

It follows that the cost of goods sold, meaning the raw materials and goods consumed, adjusted for changes in inventory, can also be reduced. It is the variable item par excellence. A company brings its share back down by reviewing its bills of materials, that is the quantity of material in each product, and then its purchasing, its sales mix and its prices, calculated on real costs.

When sales fall, values and shares tell different stories

With turnover falling, variable costs come down on their own in absolute terms, and looking only at the figures they seem under control. Their incidence, however, can rise: if discounts are granted to keep selling, the price falls while the raw material in each piece costs the same, and it weighs more on every euro collected.

Fixed costs, on the other hand, do not fall when sales do: rent and office salaries stay the same, and every euro collected has to pay a larger part of them. A fixed cost that has stayed at its usual level, however, is not reducible under this criterion: the accounts show no lower level at which the company has already operated. Bringing it down means changing the structure, with fewer people, sites or contracts: a different decision, which the accounts of the past are not enough to justify.

The comparison is made item by item over five years

The last four sets of financial statements and the estimate for the current year are set out in columns. The comparison is made account by account, on the trial balance, that is, the list of all the accounts in the bookkeeping with their balances: in the filed financial statements, consultancy fees sit on the same line as all other services and their trend cannot be seen. For each fixed item the value is compared with that of previous years; for each variable item its share of turnover is calculated for each year. Only the deviations that matter, in euros or in margin points, are flagged.

An example. A company that makes brass valves for plumbing systems has a turnover of €16 million a year. In the current financial year consultancy fees cost it €80,000 more than in previous years; over the same years the cost of goods sold has risen by three points of incidence on sales, which on that turnover are worth €480,000 a year. Both items are reducible; the second weighs much more, and that is where to start.

The typical mistake is to cut where the spending is visible

Companies in difficulty often cut the most visible items: marketing, training, quality, people. They are easy to spot and can be stopped with a signature. Cutting them when the history of the accounts does not show them to have grown loses competitiveness, customers and further margin.

The second mistake is the opposite: taking it for granted that a cost that has grown can be brought back down. An increase can be structural, such as the rise in personnel costs after a collective labour agreement is renewed. The history of the figures shows where to look; the causes are checked one by one, and action is taken where the increase is not structural.

In one's own company the test requires two columns for each account over the last four sets of financial statements and the current year: fixed costs in euros, variable costs as a percentage of turnover. The lines that are rising, ranked by what they are worth in euros or in margin points, are the list from which the cost analysis starts.

This article was prompted by a news item published in Teleborsa on 23 October 2026.