What are fixed expenses for small businesses?
What are fixed expenses?
Fixed expenses are business costs that remain the same. Typically, these costs remain consistent over a defined period, regardless of how much your company produces or sells. It's easy to budget for fixed expenses because of their predictable nature.
Fixed costs typically include expenses like rent, loan repayments, insurance payments and software to run your business. They can occur at any interval but generally are monthly or yearly payments.
However, fixed costs are, of course, subject to change. For example, your monthly rent amount may increase at the end of a year-long office space lease. Despite the shift, rent is still a fixed expense since it's predictable from month to month.
Fixed expenses vs variable expenses
Fixed expenses are predictable. The costs are consistent — you know exactly what you’ll pay and when.
Variable costs change frequently, because they depend on factors such as sales, market costs and production rates and volume. A rise in sales can also result in higher variable costs, especially when including commissions.
Unlike fixed expenses, businesses include variable costs in their cost of goods sold (COGS) when directly related to production. Examples of variable costs for small and medium-sized businesses include:
hourly labour
raw materials
packaging costs
marketing campaigns
shipping costs.
Fixed expenses examples
Fixed expenses vary depending on your business's operations, but some common examples of fixed costs for small and medium-sized businesses may include:
office space lease
equipment rentals
SaaS technology, including invoicing or payroll software.
How to calculate fixed expenses with fixed-cost formulas
Total fixed cost
Your total fixed cost is the sum of each fixed cost added together:
Total fixed cost = Fixed expense 1 + Fixed expense 2 + Fixed expense 3
Example: If a company has $4,000 in rent, $20,000 in salaries, $1,500 in software subscriptions and $3,000 in insurance, its total fixed cost would be $28,500.
Fixed costs using variable costs
Some businesses prefer to assess fixed costs per unit, which you calculate using variable expenses in the following formula:
Fixed cost = Total cost – (Variable cost per unit x Units produced)
Example: If the total cost of producing 200 units of a product is $5,000 and the variable cost per unit of the item is $20, then the fixed cost of making those units is $5,000 – ($20 x 200) = $1,000.
Average fixed cost
The average fixed cost helps you assess fixed costs per unit using this formula:
Average fixed cost = Total fixed cost / Amount of produced units
Example: If a company has a total fixed cost of $10,000 and produces 1,000 units, the average fixed cost is $10.00 per unit.
Why are fixed costs important for small businesses?
Small businesses often spend most of their budgets on fixed costs, so keeping track of them is crucial.
Managing fixed expenses has many benefits, including:
Creating an accurate budget and financial plan
Calculating your break-even point to understand profitability
Monitoring and analysing cash flow
Identifying cost-saving opportunities
Understanding the financial stability of your company.
Fixed costs and profit margin
Fixed costs play a significant role in determining a company's profit margin. Higher fixed expenses can reduce profits, so managing and lowering these costs is essential. Reducing fixed costs gives companies more flexibility to manage cash flow and develop other business areas.
For example, if a company decreases its monthly office overheads from $1,000 to $500 and retains the same output level, it'll increase its profitability by $500 per month with all else staying the same. The company can now more easily absorb revenue fluctuations.
Alternatively, the company can use the $500 saved to invest in other areas, such as marketing or customer service. In turn, this re-investment can help boost sales and increase profitability.
How to reduce fixed expenses for small businesses
1. Consider space and infrastructure
The choice of workspace can have a profound impact on your fixed expenses. If you rent an office or warehouse, choose a location with competitive rates and determine the space you need. Consider the advantages of a smaller, more affordable workspace as more and more people are now working remotely. Even a slight decrease in overhead can result in significant savings.
2. Evaluate HR and external partnerships
Before committing to expanding your team with salaried roles, weigh the potential benefits of collaborating with third-party consultants. These partnerships can often deliver the necessary services without the permanent overhead of full-time salaries. Such a strategic move can offer flexibility and reduce fixed costs.
3. Refine financial management and technology choices
Managing insurance and loans carefully is essential. Seek insurance policies with affordable premiums or consider options with higher deductibles. For debts, explore refinancing to lower interest rates or change the term of the loan.
Reduce software costs with MYOB
MYOB is a business management platform that offers everything that you need to run your business. With MYOB, you can manage your customers, projects, employees, suppliers, finance, accounting and tax, all in one place.
Cloud-based, you only pay for the capabilities you need, but can scale your software as your business continues to grow and your requirements change. As a software-as-a-service offering, you have the predictability of a fixed cost that you can budget for.
Check out our plans and pricing. At MYOB, we have you covered.