What are fixed costs? Definition, examples, and formula

Fixed costs are the baseline expenses a business must pay regardless of how much it produces or sells. These predictable, time-based costs shape pricing decisions, break-even analysis, and long-term financial planning, and they play a central role in managing cash flow. Understanding how fixed costs work helps business owners assess risk, plan for growth, and make more informed decisions as their company scales.

What are fixed costs?

Fixed costs are business expenses that remain consistent regardless of your company’s output or productivity. Rent, property taxes, insurance, and most salaries are common examples.

Fixed costs differ from variable costs, which change with production levels, and semi-variable costs, which include both fixed and variable components. While you might spend more on raw materials as sales increase, your office rent stays the same no matter how busy your business gets.

Key characteristics of fixed costs

Fixed costs, also called indirect costs or overhead costs, typically follow a predictable payment schedule tied to time rather than activity. Businesses pay these expenses monthly, quarterly, or annually on set dates, such as rent due at the beginning of each month or annual software license renewals.

These costs remain stable whether a business produces 10 units or 10,000. A factory pays the same property taxes and equipment lease costs during slow periods and peak production seasons alike.

The term “fixed” refers to stability within a relevant range and timeframe, not permanence. Fixed costs can change over time as contracts are renegotiated, providers are switched, or business needs evolve.

Fixed costs in different business models

Different industries carry different proportions of fixed versus variable costs based on how they operate:

• Manufacturing businesses typically have higher fixed costs tied to factory space, equipment, quality control systems, and plant management salaries.
• Service-based businesses often incur fixed costs related to office space, professional insurance, software subscriptions, and administrative staff.
• Retail businesses commonly face fixed costs from storefront rent, point-of-sale systems, utilities, and baseline staffing levels.
• Online and digital businesses usually operate with lower fixed costs focused on software infrastructure, hosting, security, and core team salaries.

While the exact mix varies by industry, size, and operating model, understanding where expenses fall helps clarify how a business’s cost structure affects risk, flexibility, and scalability.

Common examples of fixed costs

Most businesses share similar categories of fixed expenses, though the specific amounts vary based on industry, size, and location. These costs stay relatively stable from month to month and form the backbone of your operating budget.

Property and facility costs

Your physical location creates recurring expenses that stay consistent regardless of how well your business is performing.

• Rent or lease payments: Monthly or annual payments for office space, retail locations, warehouses, or manufacturing facilities stay the same throughout the lease term
• Property taxes: Local governments assess these taxes annually based on property value, and the amount does not fluctuate with sales or production levels
• Building maintenance contracts: Service agreements for HVAC systems, elevators, security systems, and janitorial services typically involve fixed monthly or quarterly fees

For many retail and manufacturing businesses, these location-based expenses represent the single largest category of fixed costs.

Insurance and legal expenses

Protecting your business requires ongoing financial commitments that provide coverage and professional support throughout the year.

• Business insurance premiums: General liability, property, workers’ compensation, and commercial auto insurance policies require regular payments regardless of whether you file a claim
• Professional liability insurance: Errors and omissions coverage protects service-based businesses through fixed annual or semiannual premiums
• Legal retainer fees: Some businesses maintain ongoing relationships with attorneys through monthly retainer arrangements that provide access to legal counsel as needed

These costs add predictability to your budget while reducing financial risk.

Personnel and administrative costs

Your core team and the systems that support them create stable, recurring expenses that keep operations running smoothly.

• Salaries: Full-time employees receive consistent compensation regardless of seasonal fluctuations, project volume, or monthly revenue changes
• Employee benefits: Health insurance, retirement plan contributions, paid time off, and other benefits represent fixed commitments to your workforce
• Administrative software subscriptions: Accounting platforms, project management tools, communication software, and CRM systems typically charge monthly or annual subscription fees

These expenses support day-to-day operations while remaining predictable over time.

Equipment and technology

The tools and infrastructure that power your business often involve fixed financial commitments beyond the initial purchase.

• Equipment leases: Vehicles, machinery, computers, and specialized tools often come with fixed monthly payments over multi-year terms
• Depreciation: The gradual loss of asset value appears as a fixed cost on financial statements, spreading purchases across an asset’s useful life
• Software licenses: Enterprise software, design tools, and specialized applications require recurring licensing fees that do not vary with usage

Together, these costs enable your business to operate at scale while maintaining consistency across accounting periods.

Fixed costs vs. variable costs

Fixed costs stay the same regardless of production levels, while variable costs rise and fall with business activity. When a bakery produces 100 loaves or 1,000 loaves, it pays the same rent, but it buys more flour, sugar, and packaging materials as production increases.

As sales volume grows, fixed costs become more efficient on a per-unit basis. A $5,000 monthly rent costs $50 per unit when you produce 100 items, but drops to $5 per unit at 1,000 items. Variable costs, by contrast, tend to remain consistent per unit regardless of volume.

Understanding variable costs

Variable costs change in direct proportion to production or sales activity. When a business manufactures more products, it purchases more raw materials and incurs higher production labor costs. Service-based businesses often see variable costs increase through sales commissions, transaction fees, or usage-based services as revenue grows.

Semi-variable costs

Some expenses include both fixed and variable components, placing them between the two categories. A phone plan might have a $50 base monthly fee plus additional charges based on usage. Utilities often work the same way, combining a connection fee with variable charges tied to electricity or water consumption.

Why the distinction matters

Separating fixed and variable costs helps businesses price products more accurately. Fixed costs must be covered regardless of sales volume, so pricing strategies need to account for these baseline expenses before factoring in variable costs and profit margins.

The distinction also underpins break-even analysis and scalability planning. Businesses with higher fixed costs often see profits accelerate once they exceed their break-even point, while businesses with higher variable costs experience steadier but less dramatic profit growth.

How to calculate and track fixed costs

Identifying and tracking fixed costs requires a systematic review of every recurring expense your business pays. The goal is to separate expenses tied to time and contracts from those that change with activity levels.

1. Review all recurring expenses by pulling reports from your accounting system covering the past 12 months to identify costs that recur monthly, quarterly, or annually
2. Test for volume independence by checking whether each expense stays the same when production or sales fluctuate
3. Identify time-bound commitments by flagging expenses tied to leases, contracts, or subscription agreements with set payment schedules
4. Categorize fixed costs into groups such as property, personnel, insurance, equipment, and subscriptions
5. Document payment timing by recording due dates and payment frequency to improve cash flow planning
6. Calculate totals by summing fixed costs by month, quarter, and year to establish your baseline operating expenses

Fixed cost formula and calculations

Total fixed costs represent the sum of all expenses that remain constant regardless of production volume. This includes rent, salaries, insurance premiums, equipment leases, and similar recurring costs for a given period.

You can also derive fixed costs using total production costs and variable costs:

Fixed costs = Total costs of production – (Variable cost per unit * Number of units produced)

Fixed cost per unit shows how efficiently you spread fixed expenses across output and is calculated by dividing total fixed costs by the number of units produced.

For example, a manufacturing company pays $50,000 per month in fixed costs, including $20,000 in rent, $25,000 in salaries, and $5,000 in equipment leases. If it produces 5,000 units, the fixed cost per unit equals $10 ($50,000 / 5,000).

If production increases to 10,000 units the next month, total fixed costs remain $50,000, but fixed cost per unit drops to $5 ($50,000 / 10,000). This illustrates how higher volume improves fixed cost efficiency.

Tools and systems for tracking

Accounting software such as QuickBooks, Xero, or FreshBooks automatically categorizes expenses and produces reports that separate fixed and variable costs. These tools connect directly to your bank accounts and track recurring payments without manual data entry.

Spreadsheet templates offer a flexible option for smaller businesses. You can track fixed costs by category, amount, due date, and payment frequency, then review totals monthly to monitor changes over time.

Scheduling quarterly reviews of your fixed cost structure helps surface contracts up for renewal and identify opportunities to renegotiate rates or eliminate unnecessary services before they affect profitability.

The role of fixed costs in business analysis

Fixed costs shape key financial metrics and influence decisions about pricing, growth, and risk management. Understanding how these expenses interact with revenue helps businesses evaluate profitability and plan for sustainable expansion.

Break-even point analysis

Fixed costs determine the minimum revenue a business needs to cover expenses without generating a profit or loss. To break even, contribution margin must be large enough to offset total fixed costs.

Contribution margin per unit is calculated as:

Contribution margin per unit = Selling price – Variable cost per unit

The break-even point formula is:

Break-even point = Total fixed costs / Contribution margin per unit

If a business has $100,000 in monthly fixed costs and earns $20 in contribution margin per unit, it needs to sell 5,000 units to break even ($100,000 / $20).

This analysis helps set realistic sales targets and evaluate new initiatives before committing to additional fixed expenses.

Operating leverage

Operating leverage measures how sensitive profits are to changes in sales volume based on a company’s fixed cost structure. Businesses with higher fixed costs and lower variable costs tend to see larger swings in profitability when revenue changes.

A software company with minimal variable costs can experience rapid profit growth once it exceeds its break-even point because most additional revenue flows directly to profit. A consulting firm with primarily variable labor costs usually sees steadier, more incremental profit changes. High operating leverage increases upside potential during growth periods but also raises risk during downturns, since fixed costs remain even when sales decline.

Cost structure analysis

The right mix of fixed and variable costs depends on industry, business model, and growth stage. Capital-intensive manufacturers often carry higher fixed costs tied to facilities and equipment, while service businesses tend to rely more on variable labor.

Stable markets with predictable demand can support higher fixed costs that deliver economies of scale. In contrast, volatile markets often benefit from more flexible cost structures that adjust as revenue fluctuates. Businesses can improve flexibility by converting some fixed costs into variable arrangements, such as leasing equipment instead of buying it, using contractors for fluctuating workloads, or adopting usage-based software pricing.

Managing and optimizing fixed costs

​​Actively managing fixed costs helps protect profitability during slow periods while positioning a business to scale when demand increases. The goal is not to eliminate fixed costs, but to ensure they align with revenue, growth plans, and risk tolerance.

Cost reduction strategies

Reducing fixed costs often starts with renegotiation and simplification rather than drastic cuts. Small improvements across multiple categories can materially improve cash flow.

• Negotiating lease agreements: Approach landlords well before renewal with data on comparable properties to secure lower rates, longer terms with better pricing, or tenant improvement allowances.
• Consolidating insurance policies: Bundling coverage with a single provider can reduce premiums, and annual reviews help identify overlapping or unnecessary coverage.
• Automating administrative tasks: Replacing manual workflows with software can reduce the need for full-time administrative labor while improving accuracy and speed.

These adjustments free up capital without weakening core operations.

When to increase fixed costs

Increasing fixed costs can make sense when it supports sustainable growth or lowers costs over the long term. The key is confidence in demand and timing.

Adding office space, equipment, or permanent staff is often justified when revenue growth is consistent rather than seasonal. Investing too early increases risk, while waiting too long can create operational bottlenecks.

Higher fixed costs can also unlock economies of scale. A larger facility or more advanced equipment may raise monthly expenses while enabling higher output and lower per-unit costs as volume grows.

Regular review and adjustment

Fixed costs should be reviewed on a regular schedule, not only when revenue declines. Quarterly reviews help surface contracts up for renewal, unused subscriptions, and expenses that no longer match how a business operates.

Comparing fixed costs to industry benchmarks can highlight inefficiencies. If rent, insurance, or software spend is materially higher than peers with similar revenue, renegotiation or restructuring may be warranted.

Treat fixed costs as adjustable over time, even if they remain stable in the short term. Ongoing evaluation helps keep a cost structure aligned with actual business needs.

Fixed cost management example

Consider a graphic design agency with $18,000 in monthly fixed costs: $8,000 for office rent, $6,000 in salaries, $2,000 for software subscriptions, and $2,000 for insurance. When revenue drops by 25% during a seasonal slowdown, those fixed expenses quickly create cash flow pressure.

To regain flexibility, the owner subleases unused office space, reducing rent to $5,000. She shifts two designers from salaried roles to contractor arrangements during slower months, cutting fixed salary costs to $3,500. She also consolidates overlapping software tools, lowering subscription costs to $1,200, while insurance remains unchanged.

These changes reduce monthly fixed costs to $11,700, freeing up $6,300 in cash flow each month. When demand rebounds, the business can gradually add capacity again by rehiring staff or expanding space once revenue supports the increase.

Fixed cost timeline

Most businesses experience predictable shifts in their fixed cost structure as they grow. While every company follows its own path, fixed costs often change as operations, staffing, and infrastructure expand.

• Startup phase (years 0–2): Fixed costs are typically kept low through coworking spaces, contractors, and flexible software tools. Monthly fixed costs often range from $3,000 to $8,000, with flexibility prioritized over efficiency.
• Growth phase (years 2–5): Businesses add dedicated office space, hire core employees, and commit to longer-term software contracts. Monthly fixed costs may rise to $15,000 to $40,000 as capacity expands.
• Established phase (years 5–10): Companies invest in owned equipment, expanded facilities, and broader insurance coverage. Monthly fixed costs commonly reach $50,000 to $150,000, with a focus on economies of scale.
• Mature phase (10+ years): Fixed costs stabilize at a higher level, supporting multiple locations, specialized teams, and long-term infrastructure. Monthly fixed costs often exceed $150,000, with efficiency and optimization taking priority.

A business’s fixed cost trajectory should follow revenue growth and market demand rather than arbitrary timelines.

Special considerations and advanced topics

Fixed costs do not behave the same way in every situation. Economic conditions, industry dynamics, and growth pace all influence how manageable or risky a fixed cost structure becomes.

Fixed costs in different economic conditions

Economic downturns expose the downside of high fixed costs when revenue declines but expenses remain unchanged. Businesses with long-term leases and large permanent workforces often feel pressure quickly, while companies with more variable cost structures can adjust expenses as sales fall.

Inflation affects fixed costs over time through higher rents, insurance premiums, and salary expectations. Multi-year contracts can provide short-term protection, but renewal periods often bring step increases that require planning.

Rapid growth can also strain fixed cost structures. Expanding facilities, hiring specialized staff, or upgrading equipment may be necessary before revenue fully catches up, temporarily compressing margins.

Industry-specific considerations

Manufacturing, airlines, and hospitality businesses typically operate with high fixed costs due to facilities, equipment, and baseline staffing requirements. These businesses benefit significantly from high capacity utilization but face outsized losses during demand shocks.

Consulting firms, software developers, and digital service providers usually carry lower fixed costs, relying more on variable labor and minimal physical infrastructure. This flexibility reduces downside risk but can limit economies of scale.

Many businesses operate hybrid models. For example, a software company may treat core engineering salaries as fixed costs while using contractors for project-based work, balancing stability with flexibility.

Control fixed costs with Ramp's automated spend management

Fixed costs such as software subscriptions, insurance premiums, and office leases can quietly drain your budget if they are not tracked closely. Without centralized visibility, it is easy to lose track of recurring expenses, miss renewal dates, or pay for services you no longer need.

Ramp’s accounting automation software helps you control fixed costs by centralizing recurring spend in one place. You can track subscriptions, identify duplicate services, and review renewals before they post to your books. Ramp’s vendor management tools surface all recurring payments so you always know what your business is committed to and when contracts renew.

Here is how Ramp helps you manage fixed costs:

• Track all recurring spend: Automatically identify and categorize subscription and recurring expenses across your organization.
• Catch duplicate vendors: Flag overlapping or similar vendors so you can consolidate services and eliminate redundant spending.
• Set spending limits: Create budgets and controls for categories or departments to prevent fixed costs from increasing without approval.
• Automate approvals: Route renewals and recurring payments through approval workflows so each fixed cost is reviewed before posting.
• Code transactions automatically: Use AI-driven coding to assign fixed costs to the correct accounts in real time, reducing manual work.

Try a demo to see how Ramp helps finance teams identify, track, and control fixed costs across their organization.