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What Are 'Fixed and Variable Costs'?

Fixed Costs exist no matter how much value you create. Variable Costs are directly related to how much value you create. Understanding your costs and how they fluctuate is critical in successfully managing your business operations.

Josh Kaufman Explains 'Fixed And Variable Costs'

There’s an old business adage: you have to spend money to make money. That’s largely true, but not all expenses are created equal.

Fixed Costs are incurred no matter how much value you create. Your Overhead is a fixed cost: no matter what you do in any given month, you still have to pay your salaried employees and the lease on your office space.

Variable Costs are directly related to how much value you create. If you’re in the business of creating cotton T-shirts, the more T-shirts you produce, the more cotton fabric you’ll need. Raw materials, usage-based utilities, and hourly workers are all variable costs.

Reductions in fixed costs Accumulate; reductions in variable costs are Amplified by volume. If you can save $50 per month on your phone bill, that savings accumulates to $600 per year. If you can save $0.50 on each T-shirt you produce, you’ll save $500 on every 1,000 T-shirts you make.

The better you understand your costs, the more likely you are to find ways of producing as much value as possible without spending everything you make.

Questions About 'Fixed and Variable Costs'

• Which costs of operating your business are fixed? Which are variable?
• Is there any way you can reduce your costs without reducing the amount of value you provide?

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"Watch the costs and the profits will take care of themselves."

Andrew Carnegie, nineteenth-century industrialist

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