As a business owner, you need to know everything about your finances to keep your enterprise afloat. Understanding fixed costs is an essential part of that process. In this post, we'll explore fixed costs, their definitions and categories, and answer the most common questions about them.
Fixed costs are expenses that do not change with the level of production or sales. These costs remain constant regardless of the volume of your business's output. Some commonly known types include fixed expenses, fixed overhead costs, fixed operating costs, fixed production costs, and fixed asset expenses.
Fixed costs can be sorted into two categories: committed and discretionary. Committed fixed costs are those necessary for your business operation and are usually long-term commitments. Rent is an example of committed fixed cost. On the other hand, discretionary fixed costs are optional expenses that you can decide to incur or not.
Fixed costs are critical for businesses because they enable you to understand how much it costs to keep the operations running without generating revenue or selling goods. They also help you determine how many units must be produced and sold at a minimum to turn profits.
There is no single formula for calculating fixed costs as it depends on your business and its nature. However, the general calculation is by identifying all expenses that do not vary even when output fluctuates.
It's common to mistake variable costs for fixed ones. Still, they're different in that variable expenses change based on output volume or sales activity while fixed ones don't. For instance, electricity bills might fall under variable expenses during periods with more production.
Reducing your business's fixed cost is possible in some instances like lease negotiations or moving to a cheaper location. However, it's essential to distinguish between committed and discretionary costs since they'll require a different approach.
Common examples of fixed costs are; rent, salaries, loan payments, and insurance premiums.
