If you're a small business owner, understanding your fixed costs is critical to keeping your business afloat. With the correct information, you can make sure these expenses don't become a drain on your resources or profitability.
In this article, we'll discuss fixed costs, give some examples of everyday fixed expenses for small businesses, and offer tips on keeping them from becoming a financial burden.
What is a fixed cost?
A fixed cost is an expense that is not affected by changes in production or sales volume. It is "fixed" in the sense that it remains largely consistent regardless of how much or how little you produce.
In other words, a fixed cost is not dependent on how much revenue your business generates.
Whether you're selling one product or one thousand products, your fixed costs will not be influenced by your sales volume. These costs are often vital to the operation of your business, and so they must be paid even when sales are low.
How do fixed costs apply to small businesses?
Fixed expenses allow your business to exist but don't necessarily contribute to your bottom line. Small businesses, in particular, need to track business expenses and manage fixed costs to stay within budget and remain profitable.
Fixed costs can be a significant drain on resources and profitability. If you're not careful, they can quickly eat into your bottom line and cause financial problems for your business.
Your small business may not have the same flexibility as larger companies when changing fixed costs. For example, you may not be able to easily reduce your rent payment or phone bill if sales decline. When sales are down or the economy is struggling, your fixed costs offer a baseline you can't go below.
Fixed costs vs. variable costs
There are two types of costs for a business: fixed and variable. Fixed costs are constant no matter how much business you do, while variable costs are directly influenced by how much business you have. Many factors can impact variable costs, including:
- Economic climate
- The time of year
- Fuel costs
- Raw material costs
- Supply and demand
- Changes in your business model
A small business that manufactures physical products will have fixed costs for things like the rent of its factory space and the salary of its office staff. But their variable costs will include the price of raw materials, which can fluctuate depending on production. Some other examples of variable costs include:
- Shipping and delivery costs
- Processing fees
- Taxes and tariffs
Small business fixed expense examples
Let's look at some common fixed expense examples.
- Rent or mortgage payments. Rent and mortgage payments are considered fixed expenses for small businesses, though they can change with lease renewals, refinancing, and if your debt is sold to another entity.
- Insurance. Insurance is another common fixed expense for small business owners. This can include policies on property, liability, and product liability.
- Salaries and wages. The salaries of your employees are also fixed costs. Even if you don't have many employees, their monthly wages will remain the same for their contract.
- Telephone and internet service. Most businesses need some form of phone or internet service. This is usually a contracted or bundled service with a set monthly fee.
- Equipment leases or payments. You'll have a fixed fee if you lease any equipment for your business, such as computers, printers, or vehicles.
- Loan payments. If you have a small business loan, your monthly loan payments can remain the same until the loan is paid in full.
- Utilities. Electricity, water, and other utilities also fall under fixed costs. While they may fluctuate with usage, these expenses are necessary for most businesses. Some companies offer fixed-rate packages that help keep the cost more consistent each month.
1. Example fixed cost: Rent
When you sign a lease, you agree to pay a set amount of money each month to use that space. No matter how much business you do or how many customers you have, your rent payment should remain the same during your lease period.
2. Example fixed cost: Courier wages
If your business has couriers on staff to deliver products or services, their wages will be a fixed cost. Therefore, you'll need to pay your courier the same amount each month, regardless of how much business you do.
While the cost of shipping and delivery can fluctuate depending on the volume of business you have and current fuel costs, the wages of your delivery staff will largely remain the same.
How to calculate fixed costs
To calculate your fixed expenses, you'll need to know your total production and variable costs per unit.
Once you have that information, you can use the following formula to calculate your fixed costs:
Fixed Cost = Total Cost of Production - (Variable Cost Per Unit * No. of Units Produced)
For example, let's say your business manufactures widgets. The total cost of producing 1,000 widgets is $10,000. The variable cost per widget is $0.50. To calculate your fixed costs, you would use the following formula:
$9,500 = $10,000 - ($0.50 * 1,000)
Therefore, the fixed cost to produce 1,000 widgets is $9,500.
It's important to note that fixed costs can change over time. For example, if you sign a new lease for your office space, your rent payments may go up or down. The key is to track your fixed costs regularly so you can budget accordingly.
The free fixed-cost calculator
You can easily calculate your fixed costs using Ramp's free fixed cost calculator. Simply enter your total production costs, variable cost per unit, and the number of units you produce, and the calculator will do the rest.
Manage your business spend in real-time with Ramp
If you're looking for a better way to handle your business spending, Ramp is here to help. Our spend management software makes it easy to track and manage your business expenses in one place.
Financial planning and analysis are Ramp's core competencies — we built our software to help small businesses do just that.
With Ramp, you can:
- Easily monitor and categorize your expenses
- Get real-time insights into where your funds are spent
- Find new ways to save money and reduce your costs
- Track trends and spending patterns over time
Startups and small businesses have enough to worry about — this shouldn't be another headache to add to the list. Finance automation is at the forefront of business management in 2022, and Ramp is leading the charge.
Contact Ramp today to find out how we can help you save time and money. With Ramp, you can take control of your business finances and focus on what's important: growing your business.