How to budget for fixed and variable expenses

Fixed expenses stay the same each month, such as rent or insurance premiums. Variable expenses fluctuate based on business activity, such as raw materials or shipping costs.

Distinguishing between these two expense types helps you forecast cash flow more accurately and identify where you can cut costs during lean periods. You’ll make smarter budgeting decisions when you know which expenses remain constant and which ones you can adjust as revenue changes.

What are fixed expenses?

Fixed expenses are costs that remain constant over a specified period, regardless of changes in business activity, production volume, or sales. This includes rent, insurance premiums, and loan payments that stay consistent month to month.

Because fixed expenses don’t fluctuate with output or revenue, they’re easier to plan around. You always know when a fixed expense will occur and how much it will cost during a given period, which makes them fundamental to budgeting and cash flow forecasting. Fixed expenses’ key characteristics include:

• The payment is always the same amount
• You make payments at regular intervals
• You make payments according to contractual obligations

Managing and tracking fixed costs within your monthly business expenses is usually less challenging because they’re rarely a surprise.

Common examples of fixed expenses

You’ll incur some common fixed expenses regardless of the type of business or industry you’re in. Some examples include:

• Rent or mortgage payments
• Equipment leases
• Property taxes
• Base employee salaries
• Insurance premiums
• Loan payments
• Software subscriptions
• Membership dues

In a personal budget, fixed expenses often include rent or mortgage payments, insurance, and subscription bills that stay consistent month to month.

How fixed expenses affect your budget

Fixed expenses give you a reliable baseline for monthly planning. You know exactly how much you’ll spend on rent, salaries, insurance, and loan payments before the month begins, which makes it easier to calculate how much revenue you need to break even.

The downside is that fixed expenses are difficult to reduce quickly when revenue drops. Most involve contracts or long-term commitments, so lowering these costs usually requires renegotiation or meaningful operational changes rather than short-term adjustments.

Together, fixed expenses establish the minimum amount your business must generate each month. They create your baseline cost structure, the floor beneath which spending can’t fall without major restructuring.

How fixed expenses contribute to business costs

Fixed costs usually make up 20–60% of operating expenses, though the exact mix varies by industry:

• Service businesses: 60–70% (mostly salaries, office rent, software subscriptions, insurance)
• Retail: 30–40% (store rent, base staff salaries, point-of-sale systems, insurance)
• Manufacturing: 25–35% (facility lease, equipment depreciation, administrative salaries, property taxes)
• Restaurants: 35–45% (rent, manager salaries, equipment leases, licenses and permits)
• Software/SaaS: 70–80% (developer salaries, cloud infrastructure, office space, software tools)

These figures are examples. The percentage of your business costs that go to fixed expenses depends on your operating model and cost structure.

What are variable expenses?

Variable expenses change from month to month based on your business activity. These costs rise and fall with how much you produce, sell, or consume, which makes them more flexible but less predictable than fixed expenses. Common examples include raw materials, shipping fees, sales commissions, and utilities tied to production levels.

When sales increase, variable expenses usually increase alongside them. During slower periods, these costs often fall, providing some natural relief for cash flow but also requiring closer monitoring to avoid surprises.

Common examples of variable expenses

Some common variable expenses include:

• Utility bills when usage based
• Cell phone bills when usage based
• Raw materials and inventory
• Payroll for hourly wages and overtime
• Sales commissions
• Packaging and shipping costs
• Credit card processing fees
• Travel and entertainment costs

In personal budgeting, variable expenses often include groceries, gas, dining out, utilities, and discretionary spending that changes with usage or lifestyle choices.

Managing variable expense fluctuations

Track your variable expenses over several months to identify patterns and seasonal trends. Comparing costs against sales volume or production output shows how closely spending moves with business activity and helps you anticipate when expenses will spike.

Build a cash reserve for high-volume periods when variable costs increase. Calculating your average variable cost per unit or transaction and multiplying it by projected volume gives you a realistic estimate of what you’ll need during busy months.

Historical data remains your most reliable forecasting tool. Reviewing the past 6–12 months of expenses alongside sales figures helps you plan for recurring spikes, such as higher shipping costs during peak seasons or increased material costs during production ramps.

How variable expenses contribute to business costs

Variable expenses often make up 60–80% of total business costs, though the exact share varies by industry:

• Service businesses: 30–40% (project-based contractors, travel, client entertainment, marketing)
• Retail: 60–70% (inventory purchases, shipping and logistics, commissions, packaging)
• Manufacturing: 65–75% (raw materials, production labor, packaging supplies, energy, shipping)
• Restaurants: 55–65% (food and beverage costs, hourly staff wages, disposables, volume-based utilities)
• Software/SaaS: 20–30% (customer support scaling, sales commissions, payment processing fees, additional server capacity)

These ranges are examples. Your actual variable expense mix depends on how your business generates revenue and delivers its products or services.

Fixed vs. variable expenses: Side-by-side comparison

Categorizing expenses correctly affects how you forecast cash flow and control spending. When you know which costs stay constant and which ones fluctuate, you can plan more accurately and adjust faster when revenue changes.

The biggest difference lies in how these expenses respond to revenue changes. Fixed expenses stay the same whether sales spike or slow, while variable expenses move with business activity.

Fixed expenses require long-term planning because they’re tied to contracts and ongoing commitments. Variable expenses offer more tactical control, since you can often reduce them by adjusting production, staffing levels, or discretionary spending tied to output.

Quick reference guide

Use these scenarios to quickly categorize any business expense:

• If the cost stays exactly the same every month, it’s a fixed expense
• If the amount changes based on how much you produce or sell, it’s a variable expense
• If you signed a contract or lease for a set monthly payment, it’s a fixed expense
• If the bill depends on usage, volume, or activity, it’s a variable expense
• If cutting production to zero would eliminate the cost, it’s a variable expense
• If you’d still owe the money even with no sales, it’s a fixed expense

The gray area: Semi-variable and mixed expenses

When trying to categorize costs as fixed or variable expenses, some expenses don’t fit cleanly into either category. These semi-variable, or mixed, expenses include both a stable base cost and a component that changes with usage or activity, which makes them harder to budget if you don’t break them down correctly.

Common mixed expense scenarios include:

• Salary with overtime or commission, where employees receive a fixed base pay plus variable compensation tied to hours or performance
• Real estate costs, where mortgage payments and property taxes are fixed but utilities and maintenance fluctuate with usage or occupancy
• Contractor or vendor payments that may be billed as a flat retainer, per project, or per hour depending on the agreement

Understanding these hybrid costs helps you create more accurate budgets and financial forecasts that reflect how your business actually operates.

Budgeting for mixed business expenses

Some expenses require a hybrid budgeting approach because they contain both fixed and variable elements:

• Break down the fixed and variable components: Separate the baseline cost from usage-based charges. A phone plan might include a $50 monthly fee plus overage charges that scale with usage.
• Use averaging techniques for planning: Calculate an average monthly cost using the past 12 months of data to smooth seasonal spikes, which works well for utilities
• Set thresholds and monitoring systems: Establish spending limits that trigger review when exceeded, and track these expenses more frequently to catch unusual changes early

For conservative planning, treat mixed expenses as variable when calculating your financial cushion.

Irregular expense management

Expenses that don’t occur monthly still need to be accounted for in your budget:

• Annual or quarterly payments: Insurance premiums, software licenses, professional memberships, and tax payments should be divided into monthly set-asides.
• Seasonal expenses: Inventory buildups, peak-season staffing, and heating or cooling costs create predictable spikes that should be planned for using prior-year data.
• Emergency repairs and maintenance: Equipment failures and facility repairs are unavoidable over time, so setting aside a reserve helps prevent cash flow shocks.

Including irregular expenses in your monthly budget reduces the risk of surprises and keeps cash flow more stable over the year.

Practical budgeting strategies for fixed and variable expenses

Budgeting works best when you treat fixed and variable expenses differently. Fixed costs determine the minimum revenue your business needs to stay operational, while variable expenses require flexibility and closer monitoring as sales fluctuate.

One common framework is the 50/30/20 rule adapted for business budgeting. Under this approach, about 50% of revenue goes toward fixed operating costs, 30% toward variable expenses that scale with activity, and 20% toward profit and growth reserves. These percentages vary by industry, but the framework provides a useful starting point.

Zero-based budgeting is especially effective for variable expenses. Instead of carrying over last month’s spending, you start from zero and justify each cost based on current needs, which helps prevent cost creep and keeps spending aligned with revenue.

Creating your business expense budget

Follow these steps to build a budget that accounts for both fixed and variable expenses:

1. Gather at least 6 months of financial statements to identify spending patterns
2. Categorize each expense as fixed, variable, or mixed based on actual payment history
3. Calculate average monthly costs for variable and mixed expenses
4. List all fixed expenses with their exact monthly amounts
5. Add irregular expenses prorated into monthly set-asides
6. Compare your baseline budget to typical monthly revenue

Once your expenses are categorized, set targets based on revenue percentages. Fixed expenses often fall between 20% and 60% of revenue depending on your industry, while variable expenses should scale proportionally with sales.

To account for uncertainty, create best-case, expected, and worst-case scenarios for variable costs. Using recent high and low months shows how much cash flow variability you need to absorb when revenue changes.

Tools and templates for expense tracking

Spreadsheets give you full control over expense tracking. A basic template should include columns for expense name, category, budgeted amount, actual amount, and variance, with formulas that flag overages beyond an acceptable threshold.

Expense tracking software automates categorization and reporting. For example, Ramp separates fixed and variable costs and shows spending trends over time, integrating with your bank accounts and business credit cards to import transactions automatically.

Schedule a budget review on the same day each month. Compare actual spending to budgeted amounts by category, investigate meaningful variances, and update future estimates based on current trends.

How to reduce fixed and variable expenses

Reducing expenses directly improves profitability and cash flow. Cutting costs by 10% has the same bottom-line impact as increasing revenue by 10%, but expenses are often more within your control than sales.

Small reductions across multiple categories can add up quickly, especially when you consistently review spending and act before costs become locked in.

How to cut fixed expenses

Fixed costs are harder to change quickly, but strategic reductions create lasting savings:

• Renegotiate contracts and leases: Landlords and vendors often prefer lowering rates to losing long-term customers. Revisit terms before renewal to negotiate better pricing, extended payment terms, or added services at the same cost.
• Consolidate services: Multiple tools or providers can create redundant costs. Review software subscriptions, insurance policies, and professional services to identify consolidation opportunities.
• Relocate or downsize: Office space is a major fixed cost for many businesses. Remote work policies, shared spaces, or smaller offices can significantly reduce rent without sacrificing productivity.
• Switch to variable alternatives when possible: Some fixed costs can be converted to usage-based models. Renting or leasing equipment instead of purchasing can align costs more closely with actual demand.

Review fixed expenses at least once a year to catch opportunities before contracts auto-renew.

How to optimize variable expenses

Variable expenses respond quickly to operational decisions, which gives you more short-term flexibility than fixed costs:

• Make bulk purchases: Suppliers often offer discounts for higher-volume orders. Planning purchases across multiple months can reduce per-unit costs without creating excess inventory.
• Negotiate volume discounts: Shipping carriers, payment processors, and vendors frequently use tiered pricing. Reaching volume thresholds or committing to minimums can unlock lower rates.
• Improve operational efficiency: Waste, rework, and process inefficiencies drive up variable costs unnecessarily. Streamlining workflows and reducing errors lowers costs without sacrificing output quality.
• Practice just-in-time inventory management: Ordering inventory closer to when it’s needed reduces storage costs and minimizes losses from damage or obsolescence

Track variable cost per unit over time to measure whether optimization efforts are delivering sustained savings.

Track fixed and variable expenses automatically with Ramp Budgets

Managing fixed and variable expenses manually means constant spreadsheet updates, delayed visibility, and budget surprises that derail your financial planning. Ramp Budgets gives you real-time tracking across all spend types, so you always know where you stand against your targets.

Fixed expenses like software subscriptions and rent are predictable, but variable costs fluctuate constantly. Ramp lets you create separate budgets for each category and track them independently, giving you granular visibility into both expense types without manual reconciliation.

Here's how Ramp automates budget tracking for all your expenses:

• Track spending in real time: Monitor actual spend against budgeted amounts as transactions post, eliminating month-end surprises
• Set threshold alerts: Configure notifications when spending approaches limits so you can catch variable expense spikes before they blow past targets
• Include budget owners in approvals: Route expenses to department heads so they see budget impact before approving, keeping variable costs in check
• View committed spend: See upcoming expenses from outstanding POs alongside current spending for accurate cash flow forecasting

Budget owners can monitor their own spending directly, reducing back-and-forth with finance while maintaining accountability. You'll spend less time chasing down expense reports and more time analyzing trends that inform smarter budget decisions.

Learn more about how Ramp's automated budget tracking helps keep your fixed and variable expenses under control.