Fixed Costs
Business expenses that remain constant regardless of production volume or sales activity.
Definition
Fixed Costs are expenses that don't change with the level of business activity, production volume, or sales. These costs must be paid regardless of whether the company sells one unit or a thousand units, making them predictable but inflexible components of the cost structure.
Common Fixed Costs
Facilities
- • Office rent
- • Utilities
- • Insurance
- • Property taxes
Personnel
- • Base salaries
- • Benefits
- • Administrative staff
- • Management team
Technology
- • Software licenses
- • Equipment leases
- • Base hosting costs
- • Security systems
Professional
- • Legal retainer
- • Accounting fees
- • Audit costs
- • Compliance expenses
Real-World Example
SaaS Startup Monthly Fixed Costs:
- • Office rent: $4,000
- • Core team salaries: $35,000
- • Software licenses: $1,500
- • Insurance: $800
- • Legal and accounting: $1,200
- • Base infrastructure: $500
Total Fixed Costs = $43,000/month
These costs occur whether the company has 10 customers or 1,000 customers.
Impact on Business
Operating Leverage
High fixed costs create potential for strong profit growth as sales increase
Break-even Risk
Higher fixed costs require more sales to reach profitability