A quick guide to fixed costs for small businesses

If you’re running a small business, fixed costs are likely to form part of your budgeting commitments and can play an important part in your overall business plan. 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 or variable?

Fixed costs are often what they say on the tin: expense commitments that are ongoing and not dependent on the level of output your business produces¹. 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 costs, as 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.

Another example of a fixed cost may be a business loan - this may have a consistent repayment every month (or other payment period), so you know how much you will need to put aside in order to meet your obligations. 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.

For example, if you purchase a new piece of equipment for $1,000, this may be a fixed cost that you can budget for. 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. IMB has a range of accounts that offer flexible solutions for managing your cash including high interest transaction accounts and solutions for managing your tax more effectively.

Enquire about IMB Bank Small Business services

Source:

1 - Queensland, Calculating your break-even point