Financial Glossary
Fixed Costs
Fixed costs are business expenses that remain constant regardless of the level of production or sales volume over a relevant time range. Examples include rent or lease payments, salaried employee compensation, insurance premiums, software subscriptions, and loan interest. Unlike variable costs, which scale with output, fixed costs must be paid whether the business produces one unit or one thousand. In financial modeling, understanding the split between fixed and variable costs is essential for calculating break-even points, contribution margins, and the sensitivity of profit to changes in revenue.
Problem & Application
A frequent mistake in early-stage businesses is underestimating how quickly fixed costs accumulate. A founder who adds office space, full-time hires, and annual software contracts simultaneously has locked in a fixed cost base that requires a minimum revenue level just to break even -- before a single variable cost is incurred. For seasonal businesses like campgrounds, RV parks, and waterfront properties, fixed costs continue through the off-season while revenue drops to near zero, creating a cash management challenge that a simple P and L does not make visible. Forecasting fixed costs separately from variable costs makes this structural risk explicit.
In Short
Fixed costs define your minimum burn and your break-even. Know your fixed cost base before you commit to it -- once locked in, it is very hard to reduce quickly without painful cuts.