Fixed Costs

What are Fixed Costs?

Simple Definition:
Fixed costs are expenses that remain constant regardless of how much you produce or sell. Think of them as the bills you have to pay even if you don’t make a single sale.

Key Characteristics

• Don’t change with production volume
• Usually time-based (monthly, yearly)
• Must be paid regardless of business performance
• Can change over the long term
• Often involve contracts or commitments

Common Types of Fixed Costs

1. Property Expenses

• Rent or mortgage payments
• Property taxes
• Building insurance
• Maintenance contracts
• Security systems

2. Employee-Related Fixed Costs

• Salaried staff wages
• Employee benefits
• Fixed management fees
• Basic training programs
• Payroll software subscriptions

3. Administrative Costs

• Insurance premiums
• Professional memberships
• Software licenses
• Internet service
• Phone systems

4. Equipment Costs

• Equipment leases
• Basic maintenance contracts
• Machine depreciation
• Computer system costs
• Office furniture depreciation

Real-World Examples

1. Restaurant Fixed Costs

Monthly Expenses:

• Rent: $5,000
• Basic staff: $15,000
• Insurance: $800
• Equipment leases: $1,200
• Utilities basic rate: $600

Total Fixed Costs: $22,600

2. Online Business Fixed Costs

Monthly Expenses:

• Website hosting: $100
• Software subscriptions: $200
• Customer service staff: $3,000
• Payment processor base fee: $50
• Professional services: $300

Total Fixed Costs: $3,650

Fixed vs. Variable Costs

Fixed Costs

• Rent stays same regardless of sales
• Salaried employees get paid regardless
• Insurance premiums don’t change monthly
• Software subscriptions remain constant

Variable Costs

• Raw materials vary with production
• Hourly labor changes with demand
• Shipping costs depend on orders
• Commission varies with sales

Managing Fixed Costs

1. Regular Review

• Audit all fixed costs quarterly
• Look for unnecessary expenses
• Compare with industry standards
• Negotiate better rates
• Find potential savings

2. Strategic Planning

• Plan for seasonal changes
• Budget for increases
• Consider long-term commitments
• Look for efficiency opportunities

3. Cost Optimization

• Evaluate necessity of each cost
• Look for bundled services
• Consider outsourcing
• Explore automation options

Fixed Costs in Different Business Models

1. Traditional Retail

• Store lease
• Basic staff
• Store fixtures
• Security systems
• Point of sale systems

2. E-commerce

• Website hosting
• Platform fees
• Customer service
• Warehouse lease
• Software subscriptions

3. Service Business

• Office space
• Core staff
• Professional insurance
• Basic equipment
• Marketing retainers

Optimizing Fixed Costs

1. Space Optimization

• Consider remote work options
• Use shared spaces
• Optimize layout
• Sublease excess space
• Negotiate better terms

2. Technology Solutions

• Compare service providers
• Look for better packages
• Use cloud services
• Automate processes
• Integrate systems

3. Staff Management

• Cross-train employees
• Use flexible scheduling
• Consider contractors
• Implement efficient systems
• Optimize workload