The Short Answer

What Are Fixed and Variable Costs?

Fixed costs stay the same regardless of how much you produce or sell, within a normal range. Variable costs change in direct proportion to how much you produce or sell.

In Plain English

Costs That Stay vs Costs That Move

Fixed costs stay the same every month. Variable costs go up and down with how much you sell.

Rent shows up whether you sell anything or not. Fuel shows up with every job. Knowing which is which tells you how the business behaves in a slow month.

Watch: Fixed and Variable Costs

Watch Dr. Paul Put These Costs to Work

Monthly Fixed Costs in Pro Forma Projections

How Dr. Paul lists the fixed costs that show up every month, sales or not. (9:15)

Break-Even Point Formula

Fixed costs plus the variable cost of each sale give you break-even. Here is the formula. (2:14)

A Real-World Example

The Landscaping Company in a Slow Month

Illustrative example

A landscaping company in Tampa, Florida has fixed costs of $4,200 a month: insurance, software, storage, truck depreciation, and loan interest. Its truck loan payment is $1,100 a month in cash, but only the interest part is an expense. The principal pays down the loan.

Fuel, mulch, and crew hours rise with each job. In a busy month, the business looks great. In a slow month, the fixed costs eat the profit. The owner sets a monthly sales floor from the split and books maintenance contracts to cover it. Every lawn care business should know that number.

From Dr. Paul’s Fabled Forest

Sunny the Sea Otter and the Busy Cart

Doctor Owl was at the woodworker’s stall, haggling over a hand-carved pen, when Sunny the Sea Otter drifted up, belly-up on the tide with her cart in tow.

“My cart is the busiest on the kelp coast,” Sunny said, “and the cheapest. And I’m still broke.” She patted her heart. “Feel it… it’s real.”

“What does each trinket cost you to make?” Doctor Owl asked.

Sunny knew her cart rent to the coin. She had no idea what each shell bead and ribbon cost her.

Doctor Owl drew two columns on a scroll. One for costs that never move: the cart rent and the stall fee. One for costs that come with every sale: beads, ribbon, and wrapping.

Sunny added up the second column for a single trinket. It was bigger than her price. She sold every trinket at a loss, and the busier she got, the faster the coins left.

The next morning, Sunny’s prices went up by three coins. The cart stayed busy.

This story is one of dozens told across Dr. Paul’s Fabled Forest Business School Series. You just read one from Book 2.

Dr. Paul’s Insight

Dr. Paul builds his projection models on this split, because it shapes how the business behaves in a slow month.

Put It to Work

Fixed vs Variable Costs, Side by Side

FixedVariable
Changes with sales?NoYes
ExamplesRent, insurance, salaries, depreciation, loan interestMaterials, fuel, shipping, card fees, commissions
DangerHurts most in slow monthsHurts most when the price is too low
Used forBreak-even pointContribution margin per sale

Cash vs expense: a loan payment is a fixed cash outflow, but only the interest is an expense. Plan cash and profit separately.

Gray area: semi-variable costs have both parts. A phone plan with a flat monthly fee and overage charges is one example.

Watch Out

Pitfalls When Sorting Fixed and Variable Costs

Watch OutTreating every cost as fixed

Your forecast will miss how fast costs climb in a busy month.

Watch OutCounting the full loan payment as an expense

Principal reduces the loan. Only interest belongs in profit.

Watch OutForgetting card fees and shipping

They come with every sale, so they belong in the variable column.

Watch OutIgnoring step costs

A second truck or a new hire is fixed once you add it, and it jumps at higher volume.

Why It Matters

Benefits of Knowing the Difference

  • An accurate break-even point
  • Better pricing floors
  • Projections that hold up in slow months
  • A clearer case for lenders

In Your Business Plan

How Fixed vs Variable Costs Shows Up in a Business Plan

Lenders test every plan against a slow month. A clear fixed and variable split, with break-even shown, answers that test.

Sample plan excerpt: Financial Plan, Assumptions

“Fixed expenses total $4,200 per month (insurance, software, storage, truck depreciation, and loan interest). Variable costs are projected at 42 percent of revenue, so break-even revenue is about $7,240 per month. The cash flow forecast separately includes the $1,100 monthly truck loan payment.”

FAQ

Questions Owners Ask About Fixed and Variable Costs

Is payroll a fixed or variable cost?
It can be either. Salaried staff paid the same every month are fixed. Hourly crew scheduled around the work, or commissions paid on each sale, are variable. Many businesses have some of each.
What is a semi-variable cost?
A cost with a fixed part and a variable part. A phone plan with a flat monthly fee plus overage charges is a common example. Split it into its two parts when you build a forecast.
Why do lenders care about fixed costs?
Fixed costs have to be paid even in a slow month. Lenders want to see that your sales can cover them, plus the loan payment, before they approve a loan.

More From the Series

Keep Building Your Business

Every book in Dr. Paul’s Fabled Forest Business School Series teaches one subject through short stories, real terms, and one-page worksheets.

Dr. Paul Borosky, DBA, MBA

Dr. Paul is a business consultant and author with 14+ years of experience and 1,000+ written business plans. He works with owner-run small businesses on plans, financial projections, and the systems that let a business run without the owner doing everything. This page is part of the glossary for Accounting and Finance for Small Businesses, Book 2 of Dr. Paul’s Fabled Forest Business School Series.

This page is for general educational purposes only. It is not tax, legal, accounting, or other professional advice. For decisions about your own business, consult a qualified professional.