Fixed Costs

Fixed costs don't move when your sales go up or down. Whether you have a record month or a slow one, the rent is the same. This predictability is useful for planning, but it also means fixed costs are the first thing that can crush a business when revenue dips.

Fixed vs. variable costs

Variable costs scale with revenue. Fixed costs don't. Most businesses have a mix of both. The more fixed-cost-heavy your business, the higher your break-even revenue needs to be, and the more volatile your profit margins are when revenue fluctuates.

Fixed costs and break-even

Break-even analysis is fundamentally about fixed costs. The formula — fixed costs divided by gross profit margin — tells you how much revenue you need to cover fixed overhead before you make a dollar. Businesses with low fixed costs have low break-even thresholds and more resilience.

Managing fixed costs

The best time to scrutinize fixed costs is when revenue is growing, not when it's shrinking. Growth creates the temptation to add fixed overhead that locks in commitments regardless of what happens next. Keeping fixed costs lean relative to revenue is one of the simplest ways to build financial resilience.