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Business is personal — it’s the most personal thing in the world.”
These are famous words by Michael Scott from the TV show, The Office. And although this quote conflicts with the universal belief that business isn’t personal, Michael’s point of view is perfect when learning about a business’s fixed costs — or those costs that don’t change as a company grows or shrinks.
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To identify and calculate your business’s fixed costs, let’s start by looking at the ones you’re already paying in your personal life. Then, we’ll explain how a business manages its own fixed costs and review some common fixed cost examples.
What is a fixed cost?
Fixed costs are those costs to a business that stay the same regardless of how the business is performing.
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Fixed costs are distinguished from variable costs, which do change as the company sells more or less of its product.
To better understand how fixed and variable costs differ, let’s use personal finances as an example. As a single adult, your expenses would normally include a monthly rent or mortgage, utility bill, car payment, healthcare, commuting costs, and groceries. If you have children, this can increase variable costs like groceries, gas expenses, and healthcare.
While your variable costs increase after starting a family, your mortgage payment, utility bill, commuting costs, and car payment don’t change for as long as you’re in the same home and car. These expenses are your fixed costs because you pay the same amount no matter what changes you make to your personal routine.
In keeping with this concept, let’s say a startup ecommerce business pays for warehouse space to manage its inventory, and 10 customer service employees to manage order inquiries. It suddenly signs a customer for a recurring order that requires another five paid customer service reps. While the startup’s payroll expenses go up, the fixed cost of a warehouse stays the same.
To get the full picture of what costs are associated with running your business, it’s important to understand the total fixed cost and average fixed cost.
Total Fixed Cost
The total fixed cost is the sum of all fixed costs that are necessary for running your business during a given period of time (such as monthly or annually).
