Fixed costs refer to recurring, predictable costs. These are the expenses you incur irrespective of the number of goods or products you manufacture or sell. Also called overheads, fixed costs refer to bills, wages, and other costs you incur on a monthly, quarterly or regular basis.
The most common examples of fixed costs relate to
- Rent – Whether it is a storage space, retail space, or office space, you will need to pay a fixed rent each month.
- Utilities – Electricity, water, internet, and phone services are some predictable fixed costs that you will incur each month.
- Salaries or wages – Depending on the number of people you hire, you will have to factor in the costs of salaries.
- Depreciation – Each year, the value of your assets such as machinery or equipment can depreciate which is an indirect source of your fixed costs.
- Liability insurance – Public liability insurance is crucial to protect your business against multiple liabilities. These include third-party property damage, injuries, illnesses or death, defective services or products, and cybercrime. This will entail a monthly or yearly premium as fixed costs.
- Marketing –Staying competitive in the digital era involves investing in digital marketing and building a strong online presence. Based on your marketing goals, you will have to set aside a monthly budget for digital marketing expenses such as website maintenance or hosting, email marketing, social media advertising, or content marketing.
The other sources of fixed costs can relate to:
- Bank fees
- Licenses, royalties
- Legal fees
- Recruitment costs
- Web site hosting
Fixed versus variable costs
Knowing what your fixed costs are is as important as estimating your variable costs. These are costs that are influenced by changes in any type of business activity such as production expansion, higher volume of sales, or business space expansion. For instance, variable costs go up when the production is increased to meet higher demand. Examples of variable costs include:
- Freight or shipping costs that are incurred only when products are shipped.
- Direct Materials or raw materials required to make the product.
- Production costs can vary based on the volume of production. For instance, machinery oil consumption is based on the extent of machinery usage.
- Sales commissions paid as a proportion of the volume of sales made by salespeople.
How to reduce fixed costs?
Fixed costs, typically are necessary overheads that you need to run your business. However, if you find that you are unable to achieve the break-even point, it is time to reevaluate your expenses, starting with the fixed costs. The break-even point is when your business is able to sell enough units/products to cover operational expenses and start making a profit.
The first step is to make a list of all your fixed cost sources and analyze each one of them to identify unnecessary expenditures. Check your credit card statements, bank statements, utility bills, invoices, and other expense reports to itemize each expense while separating out variable costs from fixed costs.
- Review the quantity – Do you really need that quantity or frequency of orders? Can you cut down on costs by ordering a greater quantity less frequently? Look at subscriptions, software licenses, and sponsorships that are bleeding money from your business account.
- Review your advertising. If you are spending money on strategies that are not measurable or giving you a good ROI, it is time to look at smarter, cost-effective marketing methods. Some options include selling your products on established marketplaces, offering free workshops, or starting a blog. An inexpensive and effective way to promote your products is to use your existing customers to promote your brand on social media channels.
- Do you need that office space? Examine if you need all that extra space if most of your employees are working from home or your small business is entirely online. Explore also if you can relocate your office to a different location to reduce your rent as well as travel expenses.
- Look at vehicle expenses. Transportation and vehicle maintenance costs often boost your overall fixed costs. The bigger your vehicle, the more it’s running or maintenance costs. Consider replacing it with a compact, energy-efficient vehicle to save on fuel and maintenance.
- Evaluate if you are leveraging technology – Digital solutions can help you cut down on daily commute or the expenses of scheduling regular office-based meetings. Video conferencing could save you hundreds of dollars, for instance, in travel expenses while giving you the same results that an in-office conference does.
- Go digital to save on printing costs. Create and store documents online, rely on emails and other digital collaboration tools instead of paper-based communication.
- Negotiate. From the landlord, vendors, suppliers to the energy company, you can negotiate with everyone that you do business with for better rates.
- Consult an accountant. Experienced accountants can help you find ways to cut down on fixed and variable costs such as taxes.
A key aspect you can review to streamline your fixed costs relates to liability insurance. For an affordable monthly or yearly premium, you can avoid the expenses related to compensation and legal costs of fighting claims. At Public Liability Insurance, you can compare quotes from different providers to find the best deal that offers maximum protection against public liability claims.