Fixed Cost, also called ‘overhead cost’ or ‘indirect cost’ is the business expenditure that does not get affected by the increased or decreased production or sale of goods and services. This business expense remains the same for an entire financial period and is time-dependent.
These costs are set for a specific span of time and might impact profitability if not managed well.
What is Fixed Cost?
Business costs can be categorized into two parts: fixed and variable. As the name suggests, fixed costs are relatively constant business expenses. The amount tends to be recurring regardless of sales or production.
Some of the common fixed costs consist of employee salaries, interest, rent, insurance, lease, insurance, utility payments, phone service, advertising costs, amortization, and more. They are reflected on the income statement of a start-up as indirect costs. These charges are often regarded as the entry barrier for entrepreneurs.
These costs are determined via contractual obligation with respect to the production quantity for a relevant span of time. If this overhead cost is not tracked and kept below a specific limit, it will have an adverse impact on business stock value.
Why is the Management of Fixed Costs Crucial in Start-up Sustainability?
Start-ups must evaluate fixed cost to gain insight into their current and future financial requirements.
- Brings Business Stability
Once business entities identify the fixed costs, they will remain the same for specific schedules or agreements, helping businesses make robust financial decisions and bringing stability to business operations.
- Aids Accounting Process
Analysing the fixed cost of a business helps accountants draft the financial report and present it to business stakeholders. It also helps them perform computations and assess business’s financial stability.
- Determines Break-even
This business expense is a key component needed to assess business’ break-even points. Break-even point refers to the business operation level when expenses and revenue are equal and the business entity will start making a profit from this juncture. The break-even point of a business is determined by the following formula-
Break-even point = Total cost/selling price per unit – per unit variable costs
- Economies of Scale
Proper management of fixed costs proves effective in creating economies of scale. These are cost advantages that business bodies can reap when their production of services or goods becomes efficient. Business entities can achieve economies of scale by reducing cost of production and increasing production.
Some Tips to Lower Fixed Costs for Start-ups
Minimizing any business cost will enable business owners to increase business profitability. Here are the ways business entities can lower fixed costs and boost profit margins:
- Tip 1: Subletting business warehouse space other than opting for renters will help in subsidizing costs.
- Tip 2: Conduct research and choose insurance plans that come with lower premiums.
- Tip 3: Opt for refinancing of debt to minimize interest rate.
- Tip 4: Negotiate with leasing business bodies or landlords to fetch lower rent payments.
What is the Impact of Fixed Costs on Business Profitability?
Fixed cost in a business influences the business’s gross profitability. Hence, it is important for the business body to understand and manage them. It will help them enhance business efficiency and increase business profitability.
Businesses with higher production and sales often have a higher fixed cost which can make business profits unstable. If sales drop drastically, a business may not be able to manage them which will impact the overall profit margin.
Managing the fixed cost helps in optimizing the business financial structure, thereby making an apprised decision regarding pricing structure, business finances, and volume of product.
How RazorpayX Helps Start-up Businesses Manage Fixed Costs?
RazorpayX, the business arm of Razorpay helps in streamlining business cost structure by providing one-stop solutions to multiple business functionalities. With different offerings like RazorpayX payroll services, start-ups can automate and effectively disburse employee payments and offer insurance plans to employees, thereby regulating business fixed cost efficiently.
In addition, this accounting and business platform helps businesses open current accounts, schedule payments, pay taxes and conduct multiple business particularities from a single dashboard. This business banking platform has transformed the way businesses manage their expenses. It offers a user-friendly interface that helps in tracking expenses and verifying them.
With services like vendor payments and pay-outs, business bodies can initiate 24*7 instant payments to employees, suppliers and vendors. This helps in bringing coherence to business operations, lowers fixed cost and ensures profitability.
FAQs
What is the difference between fixed and variable costs?
While fixed cost is not affected by the way business performs. Variable cost, on the other hand, changes depending on the rate of production and revenue generation. Cost of labour, materials etc., which are dependent on the volume of the production, are examples of variable costs.
Is depreciation a fixed cost in business?
Yes, depreciation is considered to be a fixed cost in business. This cost remains the same every period and is not impacted by the output. Depreciation is the expense that incurs from the reduction of the value of a tangible asset like machinery or cars that are used during the business.
What is the formula to compute fixed cost?
The formula that will enable business bodies to evaluate the fixed cost-
Fixed cost = Cumulative cost of production – (Number of units manufactured * Variable cost of per unit)
What are business utility expenses? Is this considered to be a fixed cost?
Business utility expenses are the cost incurred from internet, electricity, waste disposal, sewage etc. The utility expenses differ, however, business bodies have fixed-cost contracts where an agreed amount is paid every month.
