What New Businesses Need to Know About Fixed Expenses

Starting a business can be an exciting and overwhelming venture. Not only are you working to build your identity within the market, but you’re learning the nuances of your internal operations.

The early stages of your business are when you set the framework on which your business grows. Start strong, and your foundation will remain steady as you scale—start shaky and you risk the future of your business.

Building the foundation of your new business starts with an understanding of the costs it takes to operate. From raw materials to advertising, running a business takes money. While you can use loans and investments to manage these costs, you should strive to cover your expenses with sales as quickly as possible.

Fixed expenses are some of the most important costs associated with your business. Not only are they some of the more expensive costs, but they are independent of how well you perform. 

Let’s take a deeper look at fixed business expenses and why they are important for new businesses.

What Are Fixed Expenses?

Fixed expenses within a business are costs that do not change based on production or sales. Your fixed expenses will remain constant every month no matter how well or poorly your business performs. 

Common examples of fixed business expenses include:

• Rent or mortgage payments
• Salaries
• Subscriptions (software, cleaning, etc.)
• Equipment or machinery leases
• Insurance
• Loan payments

Fixed Expenses vs. Variable Expenses

For a new business, the main takeaway with understanding fixed expenses is that they are predictable—unlike their counterpart: variable expenses. If you have costs within your business that fluctuate based on production volume, you have variable expenses.

Variable expenses include costs like shipping, hourly labor wages, raw materials, commission payments, and electricity. These costs will increase or decrease along with sales volume.

Let’s say you run a food truck. The monthly loan payment on the food truck might be $1,000 and would be required no matter how much you sold that month. This payment is a fixed expense.

However, monthly costs associated with ingredients, the gas powering the generator, and the hourly wages of your staff would fluctuate based on your monthly performance. These are variable expenses.

Why Are Fixed Expenses Important for Businesses?

As a new business owner, you have a lot of responsibilities on your plate. From product development and sales to hiring and customer service—there is no shortage of work to be done.

However, the priority of all businesses should be profitability, and nothing affects your bottom line more than business expenses. Understanding your fixed business expenses is a great place to start when evaluating the costs of running your company.

Fixed expenses are important to a business because they are predictable and provide a baseline when budgeting or forecasting. Because your fixed costs remain constant each month, you can map out how much revenue you need—at a minimum—to cover these mandatory expenses.

Understanding your fixed expenses and being diligent about forecasting can help you prepare for unpredictable circumstances like we experienced in 2020. It can also give you the foresight to make strategic business decisions like scaling production, breaking a lease, or applying for a business line of credit.

Can Fixed Expenses Change?

Fixed expenses only change if a previous agreement is modified or canceled. By nature, fixed costs are meant to remain the same over the life of the relationship—but there are times when fixed expenses do change.

For example, your monthly expenses for employee salaries will stay the same as long as the number of salaried employees and their individual salaries are unchanged. If you hire another salaried employee or give someone a raise, then your fixed salary expense will increase. 

Business owners should always be mindful of their fixed costs and look for opportunities to lower these expenses—without affecting productivity.

If your brick-and-mortar retail business has shifted more to e-commerce since the pandemic, you may be able to negotiate a better rate with your landlord, sublease the space, or break your lease entirely.

Maybe your company signed up for a social media software that charges a monthly fee, but you recently hired a person to do this internally. You could cancel this subscription instead of paying for a tool you no longer need.

Just because an expense is fixed doesn’t mean it can’t be changed. Look for opportunities to decrease your fixed expenses without sacrificing the future of your business.

Get to Know Your Expenses

Managing your expenses—fixed and variable—is a crucial step in running a successful business. Instead of focusing solely on sales to drive profit, you can optimize your spending to increase your bottom line.

While you have a lot on your plate already, do not neglect your fixed costs. These expenses are often the ones that matter the most.

Not only should you be mindful of how much you’re spending on fixed expenses monthly, but you should also strive to lower these fixed costs whenever possible.