Learn more about what fixed costs are in business.
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Business planning is a major step in starting a business. You’ll need to know how much your business can spend on rent, utilities, and other overhead costs. If you’re looking for a fixed costs definition, look no further. Our business experts will guide you through everything you need to know about the meaning of fixed costs.
Entrepreneurs need to consider the fixed costs when planning and budgeting. Fixed costs are the costs that remain the same during a period of time, regardless of production amounts. The business must pay its fixed costs to stay in business.
Fixed costs are one factor used to determine your total cost of production and break-even point.
In business, your cost of production is a combination of fixed costs and variable costs. If you know your total cost of production and variable cost per unit, calculate your fixed costs as:
Fixed Cost = Total Cost of Production – (Number of Units Produced * Variable Cost Per Unit).
In comparison to fixed costs, which stay the same throughout an accounting period, variable costs are dependent on production levels. With each unit produced or service provided, the variable costs increase. Fixed costs, however, remain constant depending on their contract terms (such as a rental lease).
When investors consider your company, they will want to know your expected break-even point. The break-even point represents the amount of money your business needs to cover its expenses. At the break-even point, there are no losses or profits. To determine how many sales you need to make to break even, use this formula:
Break-Even Point in Units = Fixed Costs ÷ (Price – Variable Costs).
The fixed costs advantages include:
Because fixed costs don’t change, your average cost per unit will decrease if you increase your output without adding other fixed costs.
Fixed costs have some disadvantages, including:
Regardless of your business or industry, it’s important to account for your fixed costs. Because fixed costs don’t directly impact your production, consider your business needs when electing new fixed costs.
The definition of fixed costs includes start-up costs, one-time fees, and costs required to keep the business compliant. Examples of fixed costs include:
Sometimes business calculations include another cost called the “semi-variable.” Semi-variable costs can change with increased or decreased production levels, but you can predict them like fixed costs. For example, you may need to increase your costs for salaries because you need more employees to increase production.
Business owners use the fixed costs definition when budgeting and planning for a small business. Fixed costs must be paid to keep the business running and don’t change with the number of sales.
When you’re planning for your business, we can help. Our team of business experts is here to provide guidance on all your business issues, like taxes and liability. Form your business with us, and we’ll help you manage the legal requirements of owning a business.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.