Fixed Costs vs Variable Costs

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In your company’s budget, all costs can be broken down in to two categories known as fixed costs and variable costs.  Knowing the difference can help you determine whether or not your outgoing expenses accurately translate into actual growth.  For instance, if your variable costs and your profit lines are askew, it may be worth your while to look at your operating costs more closely.

Fixed costs are necessary to running your business.  They include things that don’t change much over long periods of time, such as rent, mortgage, salary employees, etc…  These are stable and make future financial planning easy.  The inevitable cost of you operating space won’t change until you sign a new lease, so you can count on that being a part of your budget for a while.

Variable costs shift with sales and production.  As these expenses increase or decrease, your profits should change accordingly.  Examples would be materials used, hourly employees, utilities, etc…  On a basic level, more money spent on materials should mean an increase in profit in the near future.  If you are operating a delivery business and notice a rise in fuel cost without a rise in sales, you should be investigating your vehicle’s presence on the road.  If there is no sudden rise in gas prices, it may be time to reevaluate your routes in order to make them more efficient.  Being aware of your variable cost may even alert you to misbehavior of one of your drivers.

As a business owner, you know the importance of keeping a budget.  Mining the expenses that are in your outgoing column down to fixed costs and variable costs will help you better understand how your business brings in profit.  Making graphs and charting these costs over a period of months may reveal truths about your business that can’t be seen by simply walking through your buildings or talking to your employees and customers.

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