What are fixed costs?
Fixed costs are business expenses that stay broadly the same each month regardless of how much you sell, such as rent, insurance and salaries.
What fixed costs means
A fixed cost does not change with your level of activity, at least in the short term. Whether a gym signs up 200 members or 400, the rent, the business rates and the reception staff cost the same. Variable costs, by contrast, rise with each sale: card fees, packaging, materials, delivery.
"Fixed" does not mean permanent. Rent goes up at review, and if a business grows enough it needs a bigger unit. These are sometimes called step costs: fixed within a range of activity, then jumping to a new level.
Common examples
- Rent, service charges and business rates
- Salaried staff (not commission or overtime)
- Insurance and loan repayments
- Software subscriptions on flat monthly plans
- Accountancy and professional fees
- Depreciation on equipment
Example
A beauty salon has fixed costs of £9,000 a month: £3,500 rent and rates, £4,500 salaries for two therapists and £1,000 for insurance, software and other overheads. Each £60 treatment uses £12 of products and card fees, so each one contributes £48 towards fixed costs.
| Treatments a month | Contribution | Fixed costs | Profit |
|---|---|---|---|
| 150 | £7,200 | £9,000 | (£1,800) |
| 188 | £9,024 | £9,000 | £24 |
| 250 | £12,000 | £9,000 | £3,000 |
The salon needs about 188 treatments a month just to cover its fixed costs. Every treatment after that adds £48 to profit.
Why it matters for your business
Fixed costs set your break-even point and your risk. A business with high fixed costs needs steady sales, but once it passes break-even, profit grows quickly. One with low fixed costs is safer in a quiet month but earns less on each extra sale. Before signing a lease or hiring, work out how many more sales you need to cover the new fixed cost.
Fixed vs variable costs
Variable costs usually make up cost of goods sold and sit above the gross profit line. Fixed costs are mostly overheads and sit below it. Separating them in your accounts lets you see your contribution margin, which is the number that tells you how much each extra sale is really worth.
Fixed costs and risk
Taking on a fixed cost is a commitment. A five-year lease or a new salaried role has to be paid in a quiet month as well as a busy one, so test it against a cautious sales forecast, not your best one.
Common questions
Basic salaries are usually treated as fixed, because they are paid whatever the level of sales. Overtime, commission, bonuses tied to sales and pay for temporary or casual staff brought in for busy periods behave more like variable costs.
Review contracts and subscriptions each year, renegotiate rent or move to flexible space, share premises, outsource work that does not need a full-time employee and switch flat fees to usage-based plans where your activity is uneven. Lower fixed costs mean a lower break-even point.