Fixed expenses are costs that remain the same each month for a business, regardless of sales or production levels. Understanding fixed and flexible costs is critical for businesses to properly budget, set prices, and analyze profitability. This comprehensive guide examines what qualifies as a fixed expense, why calculating them matters, and how to accurately track fixed costs for your company.
What Are Fixed Expenses?
Fixed expenses, also called fixed costs, refer to business expenses that do not change based on increases or decreases in sales or production volumes. They remain constant over time until a contract or agreement expires.
Some examples of common fixed business expenses include:
- Rent
- Loan interest
- Insurance premiums
- Licenses
- Salaries
- Property taxes
- Equipment leases
- Advertising contracts
- Subscriptions
These recurring expenses continue from month to month regardless of other business factors. A company must budget for fixed costs and ensure it has enough income to cover them.
Fixed expenses contrast with variable expenses, which fluctuate based on production or sales levels. Variable costs include materials, hourly wages, utilities, shipping fees, sales commissions, etc. The quantity of variable expenses changes monthly.
Why Calculate Fixed Expenses?
There are several important reasons for a business to carefully track and calculate its fixed expenses:
Budgeting
The primary reason is budgeting. Companies rely on fixed costs staying constant to plan their finances. Knowing which expenses are fixed allows businesses to more accurately budget and ensure they have the working capital to cover those recurring costs month after month.
Pricing Decisions
Fixed expenses directly impact the minimum price a company must charge to avoid losing money. When setting prices, businesses must factor in fixed costs to determine an appropriate profit margin that covers those constant overhead expenses.
Break-Even Analysis
One technique that relies on fixed costs is break-even analysis. This calculates the sales volume at which revenue would start exceeding total expenses (fixed + variable). Businesses can use their fixed costs to identify the break-even point.
Profitability Analysis
Tracking fixed expenses also helps with evaluating overall business profitability and performance from one period to the next. As fixed costs remain constant, increases or decreases in profit can be analyzed in relation to changes in sales and variable costs.
How to Calculate Fixed Expenses
Follow these key steps to calculate your company’s fixed expenses on a monthly or annual basis:
1. List All Fixed Expenses
Make a list of all expenses that remain consistent month over month. Common fixed costs include:
- Rent
- Loan payments
- Salaries
- Insurance
- Subscriptions
- Equipment leases
- Advertising
- Taxes
2. Collect Expense Amounts
For each fixed expense, determine the actual monthly or annual amount. If it changes at renewal, use the current amount you are paying.
3. Organize Expenses
You can organize fixed expenses into categories like facilities, equipment, people, etc. This can help with budgeting by area.
4. Calculate Total Fixed Expenses
Add up all of your fixed expense amounts for the period. This gives you the total fixed expenses (TFE) you must cover.
5. Compare with Variable Expenses
Calculate your total variable expenses (TVE) for the same period. Compare TFE and TVE to see the proportion of each, and how total expenses divide into fixed vs. variable.
6. Measure Against Revenue
A useful metric is to compare your TFE to net revenue for the same timeframe. This percentage shows how much of your income is consumed by fixed costs alone. A high percentage means you have less revenue flexibility to cover additional expenses.
Fixed Expenses Examples
Here are some examples of common fixed business expenses:
Rent
One of the most universal fixed costs in business is rent paid for office space, retail stores, warehouses, etc. Rent is typically contracted for 6-12 months at a constant monthly rate.
Loan Payments
Debt such as small business loans, equipment financing, or lines of credit come with fixed monthly payments. Interest and principal amounts are consistent.
Salaries
While hourly wages are a variable cost, fixed salaries paid to employees such as executives, managers, and long-term contractors do not fluctuate monthly.
Office Supplies
You likely need certain office supplies regularly, like printer paper, pens, file folders, etc. These routine supply expenses tend to be fixed.
Software Subscriptions
Cloud software used for accounting, CRM, email marketing, etc. involves fixed monthly or annual subscription fees to maintain access.
Equipment Leases
Leasing production equipment, company vehicles, printers, etc. comes with fixed monthly lease payments through the lease term.
Insurance Premiums
Insurances like business liability, property, D&O, and business interruption have fixed premiums paid monthly or annually.
Property Taxes
Owning business property incurs annual property tax levied by local government. This fixed expense is based on assessed property value.
Key Takeaways on Fixed Expenses
- Fixed expenses stay the same each month and are critical to budget for.
- Tracking fixed costs helps with pricing decisions and profitability analysis.
- Add up all recurring expenses to calculate total fixed expenses.
- Compare to variable costs and revenue to understand the expense structure.
- Record fixed expenses under operating expenses on the income statement.
Knowing your company’s fixed expenses provides a foundation for strong financial management and smart business planning. Take time each month to accurately calculate fixed costs. This helps control expenses, maximize profits, and support stable long-term growth.
FAQs
How are fixed expenses recorded on financial statements?
On an income statement, fixed expenses are recorded under operating expenses. They may be current liabilities or long-term liabilities on the balance sheet.
Can fixed expenses change?
Fixed expenses remain unchanged over the contract period but can increase or decrease at renewal if the business makes changes.
Are all fixed expenses direct costs?
No, fixed costs can be either direct or indirect costs. For example, rent is an indirect fixed cost while a machinery lease could be a direct fixed cost.
Are depreciation and amortization fixed?
Yes, depreciation of assets and amortization of intangibles are fixed expenses that lower taxable income. The amounts stay consistent year over year.
