In accounting, fixed costs are expenses that remain stable, regardless of the company's activity. Fixed costs are also called structural or overhead costs or overhead.
The expenses corresponding to a company’s fixed costs can come from different output-independent items such as
- employees' salaries;
- rent for the business premises;
- internet and telephone subscriptions;
- insurance;
- fuel costs;
- depreciation and amortization;
- taxes and duties;
- fees for accountants, lawyers, etc.; and
- various administrative expenses.
Depending on the nature of the business, some fixed costs may be variable.
For example, electricity bills for a factory or a bakery may vary according to fluctuations in production activity. The same is true for sales representatives’ fuel costs.
This threshold, which is equal to the total of fixed costs, represents the minimum level of activity that must be provided so that the company doesn’t run a deficit.
Fixed costs are therefore mandatory expenses that recur on a regular basis. They’re generally financed by the margin generated on variable costs.
When the margin generated isn’t sufficient to finance all the fixed costs, the company must find another source of financing.
For example, it can reduce its costs by relocating its premises to cut down on the cost of rent or by laying off some of its staff.
Distinguishing between fixed and variable costs and monitoring their evolution thanks to a management chart is essential for the company. This follow-up makes it possible to manage the company and to measure the profitability of the economic model.
The calculation of expenses also allows the company to identify the weight of all these costs on revenue.
The calculation of fixed and variable costs makes it possible to establish the income statement and the cash flow plan necessary to calculate the company’s net profit and break-even point.
For companies as well as individuals, the calculation of fixed costs is essential to verify the good financial health of each one and to better manage their finances.
