How to budget for fixed and variable expenses

When building your budget, you’ve probably noticed something important about expenses—they aren’t all created equally. There are things you know remain consistent, like your mortgage or software subscription costs. And then there are others that may differ every month, quarter, or year, like business travel or shipping costs.

So, how do you create a budget with both fixed (predictable) and variable (fluctuating) expenses and still maintain consistency and flexibility, without drastically impacting your profit margins?

In this article, we explain the major differences between types of expenses, how to budget for fixed and variable expenses, and how to strategically cut both costs so you can meet your financial goals.

What is a fixed expense?

A fixed expense is a cost that remains constant over a specified period, regardless of changes in business activity, production volume, or sales. This includes rent, insurance premiums, and loan payments, which tend to remain consistent month to month.

Fixed expenses are predictable over a given period. You always know a fixed expense will occur every week, month, or other interval. Although you may sometimes increase or decrease the amount of your monthly budget dedicated to these expenses, the amount remains stable for a period.

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

Examples of fixed expenses

Some common fixed expenses include:

• Lease or mortgage payments
• Base employee salaries
• Insurance premiums
• Loan payments
• Subscriptions and membership dues
• Cell phone bills

What is a variable expense?

Variable expenses, on the other hand, are less consistent. These are costs that fluctuate over time. For example, your heating and air conditioning bills may be very different depending on the time of year.

You may sometimes know when these expenses are coming, but from a budgeting perspective, they are less predictable month-to-month or year-over-year. If you don’t pay close attention to what you’re spending on variable expenses, you could end up with a mess to clean up in your budget.

But just because costs are inconsistent, it doesn’t mean you can’t plan for them. It’s one of the many reasons why creating expense categories in your budget is essential for tracking everything that’s coming in and going out in an organized way.

Examples of variable expenses

Some common variable expenses include:

• Utility bills
• Raw materials
• Payroll and commissions
• Packaging and shipping costs
• Credit card payments
• Travel, meals, and entertainment costs

What are mixed expenses?

It may seem easy to categorize all costs as fixed or variable expenses. But in practice, some expenses are more complicated. These are sometimes called mixed expenses, which can include elements of both fixed and variable expenses.

Here are a few examples:

• Salary with overtime or commission: Your employees receive a base, fixed salary. However, there may be variable elements if you compensate for extra hours or regular sales commissions.
• Real estate costs: Mortgage payments and property taxes remain constant regardless of your property's occupancy, so those are considered fixed. On the other hand, variable expenses, like utility bills and maintenance costs, fluctuate based on activity or occupancy, making them less predictable.
• Contractor or vendor payments: Depending on the contract, you could pay a consultant or contractor a fixed amount at routine intervals or varying amounts whenever an invoice arrives.

Budgeting for fixed and variable expenses

Depending on your company’s needs, you may not have the same types of expenses as another business owner. But how you think about budgeting for your fixed and variable expenses can follow a similar process, no matter the industry.

Follow these steps on how to budget for fixed and variable expenses:

1. List all your expenses

Start with your fixed monthly expenses. They are predictable and should be easier to list out. Include the amount and frequency. Next, focus on your budget variables. You may not know exactly how much you'll pay for these costs each month or year, but you do know that you'll have to pay for them at some point.

2. Determine your total income

Now that you have at least a rough idea of your total expenses, how does that match up to the income coming in? This will become your working budget, so make sure it’s realistic, in a format that is easy to understand, and that you’ve set appropriate maximum spending limits—especially for your variable expenses, which can get away from you quickly.

3. Review your budget trends

Look back at old expense records for insights that help you predict future expenses for budget forecasting. This is where using expense management software is highly beneficial. For instance, you may see that for the past five years, you've spent more on advertising in the last quarter of the year and the least in the second quarter. You can then use that information to inform your planning decisions.

4. Look for places to make cuts

If your budget is stretched or your working capital is running low, eliminate any unnecessary expenses, even temporarily. We have more tips for cutting fixed and variable expenses in the next sections.

5. Review and adjust over time.

Once you’ve identified your expenses and income, reviewed trends, and made necessary cuts, you should have a working budget for your business. The key is to review at regular intervals to ensure that you stay on track and forecast appropriately.

Look at the data to see where you're spending most of your money and make sure it's worth the investment. Make changes as necessary to maximize your budget and see those profits grow.

Just starting your business and want to get a sense of what your fixed and variable expenses will look like? Try Ramp’s startup budget calculator.

How to cut fixed costs

Reducing costs is a strategic approach to improving your business's profitability and cash flow and is often a key measure to help you realize your financial goals. Here are a few ways you can save money on your fixed costs:

• Negotiate Rent and Mortgage: Explore the possibility of negotiating lower rent payments with your landlord or consider relocating to a more affordable location. A mortgage refinance might also reduce your monthly mortgage payments.
• Optimize Insurance and Subscriptions: Review your insurance policies and subscription services. Shopping around for better insurance rates and consolidating or canceling subscriptions can lead to significant savings.
• Implement Remote Working: By allowing employees to work from home, you reduce or eliminate fixed costs related to office space, utilities, and supplies. This shift not only cuts costs but can also boost employee satisfaction.

How to cut variable costs

Likewise, if you’re looking to reduce some of your variable costs, these are some additional ideas:

• Outsource: When you outsource functions like IT or HR, you eliminate the need for special equipment, software, or temporary employees. You can then focus on your core business and turn those costs into fixed expenses to scale up or down as needed.
• Cut Unnecessary Travel and Meetings: Evaluate the necessity of business travel and face-to-face meetings. Utilizing virtual meeting tools can reduce these variable travel costs and save time.
• Renegotiate Supplier Contracts: Work on building strong relationships with suppliers and renegotiate terms to secure lower prices or better payment terms. This can directly impact your cost of goods sold and overall expenses.

Let Ramp help you track and budget for all expenses

Keeping a close eye on your business expenses—fixed or variable—is no easy task, especially when relying on manual processes.

That’s where Ramp comes in. With AI-driven technology, Ramp collects and tracks your business expenses in one place, allowing you to generate insightful reports on your finances with the click of a button. By taking these arduous tasks out of the hands of your employees, you’ll free them up to tackle more consequential work.

Ramp’s expense management software comes bundled with an industry-leading corporate card. Companies of all sizes use this card to successfully manage spending across their organizations. These tools help you stay aware of how and where every dollar in your company has been spent.

AI-powered software makes it easier than ever to identify wasteful spending and track variable and fixed expenses. Try Ramp to simplify expense reconciliation for your business.