Fixed Costs

What counts as a fixed cost

A fixed cost does not move when sales move. Sell twice as much this month and your rent is the same. Sell nothing and it is still the same. Typical examples: rent or a mortgage on your premises, insurance premiums, salaried staff, software subscriptions, equipment leases and loan payments.

The contrast is with variable costs, which rise and fall with each unit sold, like materials and shipping. Most fixed costs are also overhead, the general cost of keeping the business running rather than the cost of any particular sale.

Why fixed costs define your risk

Fixed costs are the bills that keep arriving when revenue does not. A business with high fixed costs has a high break-even point: it must sell a lot every month just to cover the base load. In a downturn, that base load does not shrink with sales, which is how profitable-looking businesses run out of cash.

The same structure cuts the other way. Once sales pass break-even, the fixed costs are already paid, so most of each additional sale drops straight to profit. This is operating leverage in plain words: high fixed costs make profit swing hard in both directions. Lean fixed costs make a business slower to scale but far harder to kill.

Fixed means fixed for now

"Fixed" is a statement about a time horizon, not a law of nature. Every cost is variable eventually: leases end and can be renegotiated, staff can be reduced, subscriptions can be cancelled. When accountants call a cost fixed, they mean fixed this month or this year, at your current scale.

That matters in a crisis. The real question is not "which costs are fixed" but "how fast can each one be unfixed": a month-to-month software plan and a five-year lease are both fixed today, but they are very different risks.

Households have fixed costs too

The same logic applies to personal finances. Rent or mortgage payments, insurance, car payments and phone plans are a household's fixed costs: the amount that must be covered before any spending choices begin. The lower that base load is relative to income, the more shock a household can absorb, which is why a budget usually starts by separating fixed commitments from flexible spending.