What Are Fixed vs Variable Expenses?

In business, expenses are generally divided into two categories: Fixed Costs and Variable Costs.

• Fixed Costs are expenses that stay the same regardless of how much you produce or sell. Think of them as the baseline costs of keeping your doors open.

• Variable Costs are expenses that change depending on your level of activity, sales, or production. The more you sell or produce, the more these costs increase.
  

In short: Fixed = stable, Variable = flexible.

2. Why Fixed vs Variable Expenses Matters to Small Business Owners

Understanding the difference between fixed and variable expenses is more than just an accounting exercise—it’s a foundation for smart financial management.

• It helps you predict cash flow more accurately.

• It guides pricing decisions by showing you what it really costs to deliver a product or service.

• It informs budgeting and cost control—you’ll know which expenses are negotiable and which ones aren’t.

• It plays a big role in break-even analysis (the point where revenue covers all costs).
  

For small business owners, mastering this concept can mean the difference between thriving and struggling to make payroll.

3. Common Examples

Fixed Costs (stay the same regardless of sales)

• Rent or mortgage payments

• Salaries for permanent staff

• Insurance premiums

• Software subscriptions
  

Variable Costs (change with sales or production volume)

• Raw materials or supplies

• Packaging and shipping costs

• Hourly wages or contractor fees tied to production

• Sales commissions
  

For example, a coffee shop’s rent is a fixed cost, but the cost of coffee beans and milk is a variable cost that rises as more lattes are sold.

4. Related Terms & Misconceptions

• Semi-variable (or mixed) costs: Some expenses have both fixed and variable components. For example, utilities often have a base charge (fixed) plus a usage-based charge (variable).

• Overhead vs. fixed costs: Not all overhead costs are fixed—some can be variable.

• Misconception: People often assume fixed costs never change. In reality, they can change periodically (e.g., a rent increase), but they don’t fluctuate directly with business activity.

  
  

For a deeper dive, see Investopedia’s overview of Fixed and Variable Costs (source).

5. Tips for Applying This in a Real Business

• Track your costs separately: Categorize expenses into fixed and variable when doing your bookkeeping.

• Run a break-even analysis: Knowing how many units you need to sell to cover both fixed and variable costs is powerful.

• Look for flexibility: Negotiate contracts or subscriptions that allow scaling up or down to match business cycles.

• Manage your variable costs: These are often easier to control than fixed costs—look for efficiencies in production or service delivery.

• Use professional help: Consider outsourcing bookkeeping and payroll to ensure accurate expense tracking. Learn more about our Bookkeeping & Payroll services.
  

Bottom line: Knowing your fixed vs variable expenses equips you to plan better, make confident pricing decisions, and keep your business financially healthy.