Your Fixed Cost Is Unforgiving, Demanding Payment Even When You Are Not Being Paid.
Fixed cost describes the sum of all the costs incurred in the same amount regardless of whether your business has revenue of $1 or $10 million. So it is almost the exact opposite of variable cost. Some people view it as the cost of being in business.
For most businesses it is the total of costs like rent, telephone, receptionist, and other similar items. Overhead is either a component of fixed cost, or the reverse/inverse is true. You decide.
It is frequently defined by what it is not. It is not a variable cost. So answering whether it varies with sales or production volume can guide you. This is not intended to be a comprehensive guide to or definition of fixed cost. It is intended to acquaint you with the term, and how it applies.
Of greatest importance to you is its use in determining break even. It forms the base of your cost curve, with variable cost forming the other component. The total cost, is the curve you get when you add fixed cost to variable cost for any level of volume. Accordingly it forms an important part of a break even analysis.
Don't obsess about having costs in your business conform to any precise definition. You are not trying to pass an accounting or economics exam. It is the concept and applying the concept appropriately that has value. Not whether you are accurate to two places of decimal. If you are right with the concept and on the larger items, you will be OK. There is great value in being vaguely right, particularly when greater precision can consume huge amounts of your time. And provide little extra actionable information.
Action is what you want. Regardless of how your business has been performing, there is always room for improvement. Examine your cost structure, with particular emphasis on those costs that are ongoing, and independent of volume. Which of them provides you with an opportunity for saving? As you carry out this investigation, remember to examine each activity from the mind set of doing it better and cheaper. Not from the perspective of doing it for less money, where the result is poorer performance.
One way to approach such an exercise is to consider how you would do a particular thing if you were starting today? Would you do it the way you are doing it today, or some other, better, way? That should help you steer clear of cutting without understanding the longer term implications.
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