How to budget for fixed and variable expenses

A fixed expense refers to a cost that remains constant over a specified period, regardless of changes in the level of business activity, production volume, or sales. This includes things like lease payments, insurance premiums, car insurance, and loan payments, as they tend to remain consistent month to month.

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Fixed expenses are predictable, which makes budgeting easier but can also be challenging to adjust in the short term. We recommend these three steps as a framework for budgeting for fixed expenses:

1. List all of your expenses that are predictable in amount and frequency (i.e. fixed)
2. Ensure you have the money to cover these expenses. That may require you to negotiate due dates if cash flow is limited at certain times.
3. If your monthly income is tight or your working capital is running low, eliminate any unnecessary fixed expenses, at least for a short period.

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For businesses, identifying fixed expenses is crucial for break-even analysis, affecting decisions about pricing, investment, and production levels. In this article, we’ll take explain what fixed expenses are, how they differ from variable expenses, and how best to budget for them so you can meet your financial goals.

What is a fixed expense?

Fixed expenses are costs that remain consistent in amount and frequency, making them predictable over a given period. You can count on these expenses to hit the bank account at routine intervals and know how much they'll cost.

You may increase or decrease the amount of your monthly budget dedicated to these expenses at times, but the amount then remains stable for a period. You always know a fixed expense is coming every week, month, or other interval.

It's easier to manage and track fixed monthly busniness expenses because they're never a surprise. Rates may increase occasionally, and you may switch to a different vendor or provider, but you can predict a fixed expense far easier than a variable expense (side note: a budgeting app like Ramp can give you the birds-eye, real-time view of your fixed expenses in one place).

Examples of fixed expenses

Some common fixed expenses include:

• Lease or mortgage payments
• Insurance premiums (including auto insurance and health insurance)
• Loan repayments
• Subscriptions and membership dues
• Cell phone bills
• Car payments
• Gym memberships

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While some may include utility bills as an example of a fixed expense, they're not always easy to predict. We'll talk about some expenses that could fit into either the variable or fixed categories in just a moment.

What is a variable expense?

Variable expenses are costs that fluctuate over time or that arrive with less predictability. You may know that these expenses are coming but never really know how much you'll pay or when the invoice may be due. This makes it harder to predict how much money you’ll need on hand to pay for them.

When expense reconciliation gets tedious, it's often due to variable costs. Think of them as the more chaotic elements of budgeting. Making sure that these costs are properly tracked and don't get out of control will require far more effort if you're still handling expense reconciliation on paper or with manual spreadsheets.

Examples of variable expenses

Some common variable expenses include:

• Raw materials
• Production or office supplies
• Payroll and commissions
• Packaging and shipping costs
• Credit card payments
• Entertainment, fuel, and grocery bills
• Fleet management
• Advertising expenses
• Car repairs

What costs are both fixed and variable?

When discussing fixed vs. variable expenses, you'll run into some costs that aren't easily categorized.

Real estate is a great example. Fixed expenses, like mortgage payments and property taxes, remain constant regardless of your property's occupancy. 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 are another example that could fit into either category. Depending on the contract, you could pay a consultant or contractor a fixed amount at routine intervals or varying amounts whenever an invoice arrives. Vendor management is another topic that can get quite complex, but the right software can help you out there as well.

Your business is unique

You'll have a unique list of variable expenses and fixed expenses that reflect industry standards and how you do business. You may find a way to make your advertising expenses more predictable while the cost of raw materials continues to fluctuate every month.

What's important is that you always have control over your budget. You want to protect your profits while seeing them grow with time. If your current expense reconciliation system is too complicated or allows variable expenses to get out of control, it's time to consider a new approach to accounting.

How to budget for fixed expenses

Budgeting for fixed expenses is rather straightforward. It comes down to a few basic steps:

1. List all expenses that are predictable in amount and frequency.
2. Make sure you have the money in your bank account to cover these expenses when due. That may require you to negotiate due dates if cash flow is limited at certain times of the month or year.
3. If your budget is stretched or your working capital is running low, eliminate any unnecessary fixed expenses at least for a short period. You may also negotiate to lower some of these expenses. For example, you could negotiate to have the annual fee dropped from your business credit card, or to have the interest rate on your debt payments reduced.
   

How to budget for variable expenses

Budgeting for variable expenses is a less predictable affair. There are a variety of approaches that you can use, but the following steps are commonly accepted:

1. List all variable expenses. 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. Collect data and look at trends over time. This is where using expense management software is extremely beneficial. You can look back at expense records for insights that help you predict future expenses. 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.
3. Set budgeting limitations for each variable expense. There are many ways to do this. Using insight from past expense records, you can determine what percentage of your budget is allocated to each cost. You can also set maximum spending limits for each cost to keep expenses under control.
4. Review all variable expenses on a routine basis. 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 fixed costs is a strategic approach to improving your business's profitability and cash flow, and oftentimes a key measure to help you to realize your financial goals. The following are a grab bag of ideas on how you might be able to save money on your fixed expenses.

• Negotiate Rent and Mortgage: Explore the possibility of negotiating lower rent payments with your landlord or consider relocating to a more affordable location. If you have a mortgage, a refinance might also reduce your monthly payments.
• Optimize Insurance and Subscriptions: Review your insurance policies and subscription services. Shopping around for better insurance rates and canceling unused subscriptions can lead to significant savings.
• Implement Remote Working: By allowing employees to work from home, you can reduce or eliminate expenses related to office space, utilities, and office supplies. This shift not only cuts costs but can also boost employee satisfaction.
• 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.
• Cut Unnecessary Travel and Meetings: Evaluate the necessity of business travel and face-to-face meetings. Utilizing virtual meeting tools can save on travel costs and also time.

Let Ramp help you track and budget for fixed expenses

Keeping a close eye on all of your business expenses—fixed and otherwise—is no easy task, especially when you’re relying on manual processes to do it.

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.

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Ramp’s expense management software come bundled with an industry-leading corporate card, which companies big and small have used to successfully manage spending across their organizations. These tools can help stay aware of how and where every dollar in your company has been spent.

AI-powered software makes it easier than ever to highlight wasteful spending and keep track of variable and fixed expenses. Try Ramp to make expense reconciliation simple for your business.