There are different classifications of costs according to the type of resources spent, time of occurrence, etc. Company activity is not stable, production or sales may increase or decrease. Dimensions of revenue also change. All costs of the company can be divided into two groups:
However, you may find that your business has different fixed costs to others, but also finances them in different ways. Let's take a closer look at what fixed costs are and how you might be able to deal with them efficiently. Fixed costs are often what they say on the tin: Some examples can include labour costs, rent and utility bills.
The rent for your commercial premises may be a good example of this, as this may remain fixed for the period of your lease. Variable costs are the other side of the coin - expenses that are more difficult to predict.
Every business is different and therefore variable costs can vary from one business to another2. Variable costs may include raw materials such as, sugar, coffee, timber and transportation costs. Some people may prefer to have the majority of expenses as fixed costsas they may be easier to budget for and as a result may be less of a strain on your overall finances.
There are a number of different ways to do this, for example, your internet and phone bills may be variable costs if you are paying them on a pay-as-you-go basis. However, with a monthly plan, these may be changed to fixed costs3. Other fixed costs may depend on your enterprise.
If you use a vehicle or fleet of vehicles, there may be a consistent fixed cost for the insurance on this fleet, but your petrol costs may be variable due to the fluctuating nature of the price at the pump and kilometres travelled.
Budgeting for fixed costs As discussed, one of the primary benefits of fixed costs, is easierbudgeting for your business.
However, simply knowing what your costs are going to be may not be enough to conquer them. There can be many mistakes that people may make when calculating and budgeting for their fixed costs - mostly based around miscalculation of the true cost of a particular asset.
However, if that new piece of equipment then requires certain resources or personnel to run it and you haven't factored this in, then you may find that your budget is no longer an accurate representation of your costs4.
Another common mistake could be failing to allow for adjustments in your fixed costs. On a weekly basis, your fixed costs are unlikely to change, but if you are planning to grow as a business, then your fixed costs may increase as you take on more staff or increase your activity.
Reviewing your fixed costs regularly and shifting priorities may be an important pathway to the success for your business.
The right Business Account can make it easier for you to do business. Convenient and easy ways to transact and stay on top of your accounts can make all the difference in managing your business finances.When comparing fixed costs to variable costs, or when trying to determine whether a cost is fixed or variable, simply ask whether or not the particular cost would change if the company stopped its production or primary business activities.
A small business owner can use a knowledge of fixed and variable expenses to determine the company's break-even point (the number of units or dollars at which total revenues equal total costs. Mar 30, · Write your business plan with the #1 online business planning tool. Start Your Plan. Estimate Spending Related to Sales.
Prev Article. If You Can, Start From Last Year. Next Article. Understanding Fixed and Variable Costs and Burn Rate. by: Tim Berry Basic Numbers. Costs are among the financial and accounting terms that have specific meanings.
/5(4). Utilities. Utility costs may be variable, fixed or mixed. For instance, when a business pays for Internet service for its offices, this is usually a flat monthly rate that does not change. While variable costs change depending on things like sales volumes, fixed costs tend to stay the same regardless of how much or how little business a company does.
Fixed costs and variable costs comprise total cost. Total cost is a determinant of a company’s profits which is calculated as: Profits = Sales – Total Costs.