Fixed vs. variable expenses: Differences and examples

Every business juggles two main types of expenses: fixed and variable. Fixed costs, such as rent or salaries, stay steady month after month, while variable expenses, such as raw materials or shipping, rise and fall with production and sales.

Knowing the difference helps with cash flow forecasting, controlling overspending, and protecting your bottom line. Understanding which expenses are predictable and which fluctuate lets you budget more accurately and make smarter decisions about scaling and investment.

What are fixed expenses?

Fixed expenses, also known as fixed costs, are business expenses that remain relatively stable from month to month regardless of activity or production levels. These expenses are often contractual or legally binding, so they usually stay the same even if your business scales up or down in the short term.

Fixed expenses examples

Fixed expenses include monthly rent, salaries, and loan repayments. Here’s a more detailed breakdown:

• Rent and lease payments: Office space, warehouses, storefronts, car leases, leased equipment, and more
• Salaries and payroll expenses: Fixed wages paid to employees with annual salaries, plus other payroll expenses such as benefits
• Insurance premiums: Regular payments for business insurance, workers’ compensation, car insurance, or liability coverage
• Loan and mortgage payments: Monthly installments for loans or mortgages with a fixed rate, including car and small business loan repayments
• Subscription fees: Software, services, or membership dues paid monthly, quarterly, or annually depending on contract terms
• Property taxes: Recurring taxes based on the value of owned property
• Straight-line depreciation: The gradual reduction in the value of assets like machinery or vehicles

Recurring expenses make up the baseline of your business’s obligations. Always make sure you have enough revenue or reserves to cover them, even when sales are slow.

Semi-fixed expenses to consider

Not every cost fits neatly into “fixed” or “variable.” Semi-fixed expenses, also called mixed expenses, stay mostly predictable but include a component that changes with usage or conditions.

Examples in a business context include:

• Utilities with base charges: You pay a minimum service fee each month, but total costs rise if production requires more power or waterSaaS subscriptions with usage tiers: A fixed platform fee may increase when you add users or exceed transaction limits
• Vendor retainers: Agencies or consultants often charge a flat monthly fee, with added costs if project scope expands
• Insurance premiums: Rates usually remain stable but can adjust based on claims, employee count, or other risk factors

What are variable expenses?

Variable expenses fluctuate in direct proportion to your business activity, rising and falling with production volume and total sales. This creates flexibility in managing costs but makes them harder to predict and budget for.

Examples of variable expenses

Many variable expenses fall into cost of goods sold (COGS), including raw materials, utilities, commissions, and other costs that vary based on your level of sales and production:

• Raw materials and supplies: Direct inputs such as lumber, fabric, or packaging that scale with production volume
• Utility bills: Electricity, water, and gas costs that increase with facility usage or seasonal demand
• Sales commissions: Payments tied directly to the revenue individual employees generate
• Shipping and freight: Transportation costs that depend on order volume and distribution needs
• Marketing and advertising: Campaign spending you can dial up or down depending on growth goals
• Travel and entertainment: Business travel, client dinners, and event costs that vary month to month
• Repairs and maintenance: Costs that fluctuate based on usage and wear of equipment or facilities
• Credit card interest and fees: Variable charges tied to outstanding balances or late payments
• Contract labor: Hourly or project-based payments to freelancers or seasonal workers

Because variable expenses scale with activity, they directly affect gross margins. Tracking them closely helps you spot patterns, prevent overspending, and make smarter forecasting decisions.

Seasonal variable expenses

Certain variable expenses spike at predictable times of year. Planning for these fluctuations makes cash flow forecasting more reliable.

Examples include:

• Shipping surcharges: Extra costs during peak holiday demand
• Energy costs: Higher bills in winter for heating or in summer for cooling
• Seasonal labor: Additional workers hired for holiday sales or summer workloads
• Marketing campaigns: Increased spending around product launches or year-end promotions

For businesses, setting aside reserves or modeling seasonal costs in forecasts helps prevent shortfalls when expenses temporarily increase.

What’s the difference between fixed costs and variable costs?

The key difference is how each behaves relative to business activity. Fixed costs remain steady regardless of production levels, while variable expenses change in response to fluctuations in production or sales.

The following table summarizes the differences:

How each type affects your budget

Fixed expenses provide stability, making them easier to plan for but harder to reduce quickly. They create a baseline of obligations your business must cover regardless of revenue.

Variable expenses are less predictable but offer flexibility. Because they scale with activity, they present the best opportunities for cost-cutting during slower periods. Tracking both types helps finance teams forecast more accurately and protect profit margins.

Understanding fixed and variable expenses

Knowing the difference between fixed and variable expenses gives you better insights into your business spending, improves your cash flow management, and protects your bottom line. Here are five reasons it matters:

Better budgeting and forecasting

It’s easy to allocate funds for fixed expenses, but understanding variable costs helps refine your forecasts. This enables more accurate budgeting because you can plan for predictable monthly payments and the periods when higher variable costs are likely.

Improved cost control

Once you know how to identify fixed and variable expenses, you can develop strategies to prevent overspending during low-revenue periods. Variable costs will naturally decrease when sales or production fall, but managing fixed expenses usually involves longer-term decisions, such as negotiating contracts or deciding whether to add salaried team members.

More accurate profitability analysis

Understanding fixed and variable costs allows you to calculate your break-even point. Your break-even point is when your revenue and expenses are equal—no longer operating at a loss. This calculation can guide decisions such as whether to raise prices or adjust production.

Enhanced scalability and flexibility

Recognizing the impact of variable expenses helps you make decisions around scaling operations. If you have high fixed costs but low variable expenses, you might struggle to adjust quickly when demand rises. On the other hand, if you have high variable costs, you can adapt more easily.

Improved operational efficiency

Analyzing fixed and variable expenses highlights opportunities to improve operations and cash flow. For example, knowing that utility costs fluctuate might prompt energy-saving initiatives, while high fixed costs could signal a need to renegotiate vendor contracts.

How to calculate your fixed vs. variable expenses

Knowing how much of your budget goes to fixed versus variable expenses makes it easier to forecast cash flow and identify cost-saving opportunities. A review process can give you clarity:

1. Collect records: Review at least three months of bank statements or general ledger entries
2. Categorize costs: Mark each line item as fixed, variable, or semi-fixed
3. Total each category: Add up how much you spend in each type of expense over the period of time
4. Compare to revenue: Check how fixed costs scale against sales and whether variable expenses are growing faster than income
5. Look for patterns: Identify areas where overspending happens most often and where savings may be possible

Example:

A small business reviews its last quarter of expenses and finds:

• Fixed expenses: $20,000 each month for rent, salaries, insurance premiums, and loan payments
• Variable expenses: Between $8,000 and $15,000 each month for raw materials, utility bills, and shipping costs
• Revenue: $50,000 to $60,000 per month

From this calculation, the business sees that fixed expenses consistently take about 33–40% of monthly revenue. Variable expenses fluctuate, but when they peak, total costs reach 70% of revenue. With this visibility, finance leaders can focus on controlling variable costs to protect profit margins while ensuring fixed expenses stay within a sustainable range.

The impact of fixed vs. variable costs on profitability

Fixed and variable costs directly affect your profit margins and overall financial health.

Fixed costs create a consistent baseline of obligations you must meet regardless of business activity. If you have high fixed costs, you also have high operating leverage. That means you can increase profitability with additional sales, but you’re at greater risk during revenue downturns. To manage this risk, set a monthly budget for fixed expenses so you meet your obligations without compromising growth.

Variable costs fluctuate with production or sales, so they have a more direct impact on gross margins. Higher variable costs reduce the profitability of each unit you sell. But since these costs scale with activity, they provide flexibility. You can adjust operations in response to demand without hurting profits.

By controlling variable costs and optimizing fixed expenses, you can maximize profitability and stay agile in changing business conditions.

Strategies for managing fixed and variable expenses

Once you’ve calculated and tracked expenses, the next step is learning how to manage them. Clear strategies help finance teams control costs without limiting growth.

Reducing fixed expenses

• Negotiate lease terms: Seek better rates for office space or equipment leases when contracts renew
• Refinance loan payments: Lock in lower interest rates on business loans or mortgages to reduce monthly obligations
• Audit subscriptions: Review SaaS platforms, memberships, or streaming services to cut unused or duplicate tools
• Downsize if needed: Evaluate whether your current office space or asset base matches your team’s actual needs

Fixed expenses are non-discretionary; you pay them regardless of revenue. Keeping them lean improves flexibility and strengthens your emergency fund planning by reducing the minimum cash reserves you need to operate.

Controlling variable expenses

• Set departmental limits: Use spending policies or card controls to cap travel, dining out, or entertainment budgets
• Analyze patterns: Track fluctuations in raw materials, shipping, and utility bills to identify overspending
• Plan for seasonality: Build higher shipping or energy costs into forecasts to avoid last-minute surprises
• Use cash flow tools: Budgeting apps and accounting software can flag when variable costs outpace revenue growth

Because variable costs often include discretionary spending, they’re the easiest place to save money. Cutting back on areas like marketing campaigns or travel during a slow period can protect margins without affecting essential operations.

Handling semi-fixed and mixed expenses

Some expenses don’t fit neatly into fixed or variable categories. Treat semi-fixed costs by splitting them into a predictable base (fixed) and a variable portion. For example, a SaaS contract may have a fixed fee plus user-based charges. This keeps forecasts more accurate.

Budgeting frameworks and cash reserves

• The 50/30/20 rule: In personal finance, this suggests 50% of income goes to needs, 30% to wants, and 20% to savings. Businesses can adapt it by making sure fixed expenses don’t consume more than half of revenue, leaving room for growth.
• Discretionary vs. non-discretionary: Categorizing each expense this way makes it easier to know which costs you can reduce quickly (discretionary) and which you must cover (non-discretionary)
• Emergency fund planning: Your fixed expense total should guide the size of your reserve fund. A higher fixed-cost base requires more months of expenses saved to weather downturns.

Managing expenses through these frameworks strengthens financial planning and makes decision-making easier when revenue fluctuates.

How Ramp simplifies accounting for fixed and variable expenses

Managing both fixed and variable business expenses can feel like juggling two completely different financial problems. Fixed costs, such as rent and salaries, demand consistent allocation, while variable expenses such as travel, supplies, and contractor fees fluctuate unpredictably—making accurate budgeting a constant challenge for finance teams.

Ramp’s expense management automation software addresses these challenges with intelligent automation and real-time visibility. The platform automatically categorizes expenses as they occur, distinguishing between recurring fixed costs and fluctuating variable expenses. This eliminates hours of manual sorting and reduces the risk of misclassification that can throw off budget projections.

For variable expenses, Ramp’s customizable spending controls let you set precise limits by merchant category, time period, or vendor. You can create virtual cards with preset spending limits for different expense categories, helping variable costs stay within budget. When an employee books travel or purchases supplies, they work within pre-approved parameters that align with your budget allocations.

Ramp’s real-time reporting transforms how you track budget variance. Instead of waiting until month-end to discover overruns, you can monitor spending patterns as they happen and adjust proactively. Dashboards display spending trends across fixed and variable categories, highlight anomalies, and surface actionable insights for better forecasting.

By combining automated categorization, granular spending controls, and real-time visibility, Ramp turns the complexity of managing mixed expense types into a streamlined process. Finance teams gain the control and clarity to keep budgets accurate while giving employees the flexibility to operate efficiently.

Modernize your expense tracking system

Accurately tracking your business expenses is the first step to managing fixed and variable costs, and the right tools make this job a lot simpler. Ramp's modern finance operations platform streamlines how businesses track and manage their expenses, making financial planning, budgeting, and reporting more accurate and efficient.

Watch a demo video to learn more about how Ramp customers save an average of 5% a year across all spending.