Fixed costs

What it means

Fixed costs do not follow volume: rent, overhead salaries, software, insurance, bookkeeping. The company pays them having sold nothing, so they set the minimum sales needed to survive.

The split between fixed and variable is a management category, not an accounting one. It does not fall out of the ledger: someone has to make it once and then maintain it.

Fixed does not mean unchanging over time or unavoidable. Rent can rise through indexation and a software subscription can be cancelled; a cost is fixed because within the period it does not move with production or sales volume. The split describes how a cost behaves against volume, whereas an expense in the accounting sense mainly concerns which period it belongs to.

How it works in practice

Fixed costs and the contribution margin give the break-even point. It is the one number that tells an owner how the month will land before the books close.

Fixed costs are only fixed within a range. Another shift, another warehouse or a third person in the team lifts the whole step, and that is where growth plans most often miscount.

For a sole trader or a small s. r. o., fixed costs include items the owner often does not think of as costs: the trader’s own contributions, the car lease or the director’s salary. Once we add them to the calculation, the minimum monthly revenue the business needs usually turns out noticeably higher than the owner expected.

What to watch out for

In a downturn marketing and training get cut first because they are easy to cut. Yet the bulk of fixed costs sits in long-term contracts that cannot be terminated, and those are handled by negotiation, not by delay.

Spreading fixed costs over each product on last year’s volume distorts the costing. When volume falls, each unit carries more overhead, the price goes up, sales fall further and the company prices itself out of the market. For decisions on price or on taking an order, the contribution margin is what counts, not the full cost.