Fixed cost is one of the terms often used in the business world to describe regular, recurring expenses that businesses must pay. This means that these costs will remain the same, and that businesses will continue to pay the same amount of money for these costs regardless of the changes to production or sales.
These costs are typically not tied to the quantity produced or sold by your business, but rather to time. In other words, regardless of whether it produces one product or 1,000 pieces, the fixed costs remain the same, hence the name.
Fixed cost examples
Now that we understand the definition of fixed cost in business let’s see what expenses this includes. For example, you have:
- Rent/Lease: One of the best examples of fixed cost is the rent or lease that your business has to pay for its space. Most companies rent their office space rather than own it, meaning they make monthly, six-month, or annual payments to the owner. With that being the case, the cost of rent remains the same regardless of whether you had a hectic month or if there was barely any work to be done.
- Wages/Salaries: Another example of fixed cost includes salaries and wages of permanent employees. You also pay this monthly, so it falls under the same category. It also doesn’t change regardless of how much work your business sees during the month.
- Insurance: As a business, you can’t skip out on insurance, as you never know what might happen that could ruin your business if it is not insured. However, insurance premiums are typically paid regularly, so we consider them to also belong in the fixed cost category, regardless of whether you pay them monthly or annually.
- Utilities: Every business spends resources like water, electricity, and alike. Heating and cooling are generally also included, depending on the location. These expenses are also relatively consistent over time and are usually unaffected by production levels.
- Loan Payments: If your business has taken out a loan with fixed monthly payments, you must keep making them regularly until the loan and interest are paid off. This can be considered a fixed cost, as any loan that can make a difference for a business typically ends up being large enough that you must keep making payments for several years.