Everything you need to understand and distinguish between fixed and variable costs

What are a company's fixed and variable costs? Distinguishing between these two types of expense is vital for entrepreneurs and company managers, so that they can assess the profitability of their business while keeping the inherent costs under control.

It's a good idea to look at the question of variable costs as soon as you set up your business: you'll gain overall visibility and be better able to estimate the costs you need to plan for.

Generally speaking, having a clear idea of your company's variable and fixed costs is one of the keys to better overall management of your business. Let's take a closer look at these accounting entries.

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Variable costs

Definition

Variable costs, also known as "operating costs" or " business costs ", vary according to the company's activity.

The greater the level of activity, the higher the total amount of variable costs.

These costs vary :

• over time (from one month to the next, for example),
• according to the company's volume of business.

Examples of variable costs

• the cost of raw materials (supplier costs),
• distribution costs
• commissions
• payment of your sub-contractors,
• the variable part of salaries,
• logistics costs,
• travel expenses, etc.

The amount of variable costs is used to define the margin on variable costs.

Fixed costs

Definition

Fixed costs are also referred to as "structural costs" or "overheads".

These are costs charged to the company, regardless of its sales or production volume.

They imply a periodicity of payment: they are regular expenses to be foreseen in the company's accounts.

Fixed costs are financed by the margin on variable costs.

Examples of fixed costs

• Rent, whether for buying or renting premises,
• energy consumption, such as electricity,
• insurance
• subscriptions (internet, software, etc.),
• depreciation of fixed assets,
• certain fees (accountant, lawyer),
• salaries and benefits,
• taxes (business property tax, corporation tax, VAT where applicable).

Table of fixed and variable costs and differences

Summary table of fixed and variable costs :

Mixed expenses

Mixed costs, or "semi-variable costs", as their name suggests, are made up of a variable part and a fixed part.

Is the salary a fixed or variable expense? It depends! For example, the salary of a sales executive with a fixed component and a variable component (target-based bonuses) represents a mixed expense.

What is the purpose of calculating fixed and variable costs?

Distinguishing between variable and fixed costs, and monitoring them using a dashboard, enables you to manage your business and measure :

• the profitability of its business model
• the weight of its various costs on sales.

It can be used to

• establish
  • the cash flow plan
  • the income statement;
• calculate
  • the margin on variable costs,
  • sales margin,
  • break-even point, etc.

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The importance of knowing how to differentiate between fixed and variable costs

A few tips to conclude this article:

Tip 1 ^: Remember to regularly reassess your company's break-even point, once a year for example.
Tip 2 ^: Talk to your chartered accountant to validate your accounting vision and the resulting strategy.
Tip No ^. 3: This will enable you to take measured risks to drive your business forward, without falling below the break-even point.