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What is fixed cost and why is it crucial for small businesses?

fixed cost

Owning a small business isn’t always fun or easy; it can quickly become way costlier than you might have imagined. Some small business expenses are variable in nature (variable costs). These include marketing, advertising, packaging, delivery, and so on. You can try to play around with some of these expenses by cutting back on them, searching for better solutions when your business is doing well or investing more in them when your business needs a boost. Understanding the concept of acquiring new customers and its associated cost is crucial; this article demystifies what the cost of customer acquisition is, detailing how you can calculate it for your business and offering strategies to optimize it for superior business growth.

We will have a valuable hint for you towards the end about how you can integrate an innovative new system to your business to lower your costs. For now, let’s get back to shedding some light on different types of business expenses.

Besides the more flexible ones, there are also fixed costs that you will have to pay no matter what. The fixed costs that you have to take care of might be your rent, utilities, insurance, and salaries. Again, these costs are often not flexible.

Your fixed costs

Fixed costs are the expenses that do not change with the number of goods or services you produce. Fixed costs are also known as indirect costs, independent of whatever it is that you’re selling and its quantity. This article offers insightful strategies for how small businesses can efficiently manage and lower their fixed expenses.

Some examples of fixed costs are;

Rent: You may have a physical business office, a shop, or a cafe for which you will be paying rent unless it belongs to you. The rent we pay is commonly negotiated at a fixed amount with a fixed interest on an annual or multi-year lease or contract. For most online businesses, their web hosting will be like their rent. Some e-store owners however, have both the web hosting and storage/warehouse rent as a fixed cost.

Insurance: Insurance fees, like liability coverage and health insurance, will be negotiated and estimated as fixed costs in a contract.

Salaries: A salary is a certain amount of money paid for a certain amount of time. Salary changes aren’t necessarily linked to product performance.

Depreciation: Depreciation can also be considered a fixed cost; like your business laptop becoming weary with heavy everyday use due to high sales volume, digital clutter you need to clean up regularly, and outdated hardware/software. The same goes for a camera or a drone, your company vehicle, etc.

Your fixed costs that apply to you specifically will naturally vary depending on the type of business you are running. For an online craft shop, for example, web hosting and domain are inescapable fixed expense items, whereas a bread or bakery shop that isn’t selling anything online will be putting in the store rent as their fixed cost.

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Calculating your fixed costs

A fixed cost formula is an accounting formula that determines which expenditures are fixed costs within your overall spending. Fixed costs can be calculated in a number of ways. Let’s dive into the two distinct and most used choices to provide a clear understanding, because it can be quite useful to know both. Seeking to determine the point at which your costs and revenue balance out? Let our comprehensive guide unveil the intricacies of calculating the break-even point using fixed cost formulas.

The first simple formula for calculating fixed cost is:

Method #1

Simple, right? The only thing you want to make sure of if you chose to go ahead with this method is, to know exactly what your fixed costs are.

Whenever you get confused or are unsure about what does and does not fall under fixed costs, just remember that fixed costs are typically the costs that do not change no matter how much business you do. They also do not change with production volume or sales revenue. Fixed costs are often called overhead because they are “overhead” for the company – meaning they must be paid even if a company produces nothing or sells nothing. Understand the role of fixed costs in determining your company’s break-even threshold and enhance its profitability with our comprehensive guide.

Method #2

You could also choose to follow an induction method if that’s what’s easier for you. For instance, you might be on top of your variable costs, so you could work with the data you have to calculate your fixed costs. Since total costs are the sum of fixed and variable expenses, you may determine the fixed costs if you identify your variables correctly and deduct them from your total costs.

Operating your business with lower costs

A constant part of small and medium-sized business owners’ job is to think and think harder. Businesses that closely follow what’s new and what recent technology or services are available have a higher likelihood to cut their costs without any negative impact on their service or product quality.

Thousands of apps and smart systems are developed every day that claim to make life easier for small business owners. Most fail, but the minority that survives is here to stay because they actually solve an important problem or improve efficiency. Discover how understanding and managing your business’s Cost of Goods Sold (COGS) can further enhance efficiency and streamline operations with our in-depth guide.

Whether you’re a wholesale florist, a brewery, or a distillery, Metrobi can help you improve your operations and workload without having to hire a delivery person. Metrobi is a last mile delivery service headquartered in Boston that helps small and medium-sized businesses manage their deliveries. As your trusted third-party delivery partner, Metrobi allows you to focus on what you do best while we handle the rest.

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