Fixed Costs

What Are Fixed Costs?

Fixed costs do not change based on your business activity level. Whether you sell one unit or one thousand units, these expenses stay the same. They are the baseline costs of keeping your business running, sometimes called overhead.

Common fixed costs include office or retail space rent, insurance premiums, salaries for permanent staff, loan payments, software subscriptions, and equipment leases. For a coffee shop, the rent is fixed at $3,000 per month whether they serve 100 or 1,000 customers.

Why It Matters for Your Business

Knowing your fixed costs is critical for financial planning and understanding your minimum revenue requirements.

• Break-even analysis: Your fixed costs determine the minimum amount of revenue you need to cover expenses before turning a profit. The formula factors in fixed costs, selling price, and variable cost per unit.
• Pricing decisions: If your fixed costs are high, you need either higher margins or higher volume to be profitable. This directly impacts how you price your products or services.
• Risk assessment: Businesses with high fixed costs are more vulnerable during downturns because those costs persist even when revenue drops. Lower fixed costs give you more flexibility.

One strategy for managing risk is converting fixed costs to variable costs where possible. For example, hiring contractors instead of full-time employees during uncertain periods keeps your cost structure more flexible.